The Chancellor of the Exchequer recently delivered his Spring Budget – and among the raft of measures were big changes to pension allowances.
The Chancellor hopes that his pension reforms might encourage people who’ve retired early to rejoin the workforce, and those who are close to retirement to remain in work.
So what did he announce and what impact will the changes have on you?
And if you’re retired, are you now thinking of returning to work?
Let’s take a closer look at what the Chancellor has announced…
Tax-free pension limits raised
The pensions annual tax-free allowance is being increased from £40,000 to £60,000. So if you’re thinking of paying extra into your pension to make up for any years that you didn’t contribute much – if at all – then this could be good news for you.
Lifetime allowance charge scrapped
The maximum amount you can draw from your pension in your lifetime without being hit with a higher tax bill is known as the lifetime allowance and currently stands at £1.07m.
If you go over the allowance, you may have to pay a tax charge on the excess if you take a lump sum or draw income from your pension pot.
So it was significant to hear from Mr Hunt that the charge would be scrapped this April , with the abolition of the lifetime allowance following next year.
The Chancellor believes this will simplify the UK’s tax system and incentivise older people to stay in work for longer.
It’s worth pointing out, though, that Labour swiftly promised to reverse this measure if it wins the next general election, while many analysts and experts are openly doubting whether the change will make a difference in encouraging people to remain in the labour market.
One thing is for sure – pensions look set to be a key battleground when the election finally comes.
Pension Commencement Lump Sum (Tax Free Cash)
You can receive a tax-free lump sum when you become entitled to your pension benefits – and this is called the Pension Commencement Lump Sum (PCLS). The maximum amount that most people can claim is currently 25 per cent of their available lifetime allowance when this sum is taken. Although the lifetime allowance is being scrapped, the PCLS will remain at a maximum of £268,275 and then be frozen.
Tapered Annual Allowance revised
If you earn a high salary – with a threshold income above £200,000 or an adjusted income above £240,000 – then the Tapered Annual Allowance limits how much tax relief you can get on your pension savings.
However, the minimum Tapered Annual Allowance is to increase from £4,000 to £20,000, and the adjusted income threshold will go up from £240,000 to £260,000.
Money Purchase Annual Allowance to increase
The Money Purchase Annual Allowance (MPAA) limits how much you can contribute to your pension tax-free every year after you withdraw money, which can make a big difference if you want to top up your income by dipping into your pension savings.
The Government therefore wants to give pension savers greater flexibility by increasing the MPAA to £10,000.
So if you’re retired, will the changes to pensions make you go back into the labour market?
If you’re tempted, a recent poll by Interactive Investor suggests you’ll be in a minority, as just nine per cent said increasing the pension annual allowance and MPAA would motivate them to return to work, while 54 per cent said scrapping the lifetime allowance wouldn’t encourage them to work as they like being retired.
It will be interesting to see what impact, if any, these measures will actually have, as we know many of you will have worked long and hard to enjoy a fulfilling retirement.
If you have any questions about what the latest changes to the pension system mean for you and your finances, please don’t hesitate to get in touch, and we’ll be happy to speak with you.