One of the big headlines from the Chancellor’s 2023 spring budget was changes to the tax limits on pension savings. We’ve created a quick summary of the main changes that might impact you to make sure you’re kept up to date.
The Annual Allowance
The Annual Allowance is the amount of money you can save in pension benefits each year without incurring a tax charge. The Chancellor announced this cap has risen from £40,000 to £60,000 from 6 April 2023.
The Tapered Annual Allowance
The Tapered Annual Allowance is the point at which the Annual Allowance is reduced for high-income individuals. From 6 April 2023, affected members will have their Annual Allowance reduced by £1 for every £2 their ‘adjusted income’ is over £260,000. This continues until the minimum allowance is reached, which is £10,000 from 6 April 2023, increased from £4,000.
Adjusted income is taxable income, plus pension contributions, including those from your employer. The government website has more information on how to calculate income for the Tapered Annual Allowance at www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance.
Money Purchase Annual Allowance
When you start drawing money from a defined contribution pension, the amount you can pay into any other defined contribution pensions without paying a tax charge is limited by the Money Purchase Annual Allowance.
The Money Purchase Annual Allowance is now £10,000, to keep it in line with the minimum Tapered Annual Allowance.
As the RMSPS is a defined benefit (otherwise known as a final salary scheme) this change will not impact your benefits held in this Scheme but may affect benefits you might hold in defined contribution schemes with the Royal Mail Pension Plan, personally or with another employer.
The Lifetime Allowance
The Lifetime Allowance is the maximum amount an individual can take from all their registered pension schemes without incurring additional tax charges. This does not include the State Pension. A 55% tax charge is applied to amounts above this threshold withdrawn as a lump sum, or 25% if paid as a pension.
The budget removed the tax charges for amounts exceeding the Lifetime Allowance for the 2023/24 tax year, and it is likely the Lifetime Allowance will be abolished completely from 6 April 2024.
Pension Commencement Lump Sum (PCLS)
When you start drawing your pension you can choose to receive a tax-free lump sum payment of up to 25% of your pension. The maximum amount you can claim tax free is currently £268,275 (which is 25% of the current Lifetime Allowance).
The PCLS amount will be frozen at £268,275, even though the Lifetime Allowance is being removed.
For more information on pensions legislation and taxation, take a look at the pensions page of the government website www.gov.uk/browse/working/workplace-personal-pensions
If you’re not sure how these changes will affect you or you want more information about the budget, the government’s MoneyHelper website has a useful article and contact details for further help. www.moneyhelper.org.uk/en/blog/everyday-money/what-the-2023-spring-budget-means-for-you
If you’d like advice on your pension savings, the MoneyHelper website also has a section on financial advice here www.moneyhelper.org.uk/choosing-a-financial-adviser