Would you want to work for longer if there was a change to pension tax policies? That’s what the government is hoping, as they have recently unveiled plans to incentivise a longer working life for those who are reaching retirement age.
From 6th April 2023, new measures will be introduced, allowing individuals to build their retirement savings further than previously allowed, should they continue to work past retirement age. At the same time, this will hopefully help to restore the UK’s economy and support much-needed services, such as the NHS.
What is included in the pension tax reform?
As part of their bid to encourage older workers to remain in business, the government announced several changes to pension tax…
Currently, the pension Annual Allowance is £40,000, but this is set to increase to £60,000. This will mean that workers will be able to save a maximum amount of £60,000 each year with tax relief. If your income is above £240,000, you’ll be well aware of the Tapered Annual Allowance, which is a reduced Annual Allowance for those who earn over a certain threshold. The threshold is currently £240,000, but from 6th April 2023, it will be increased to 260,000. Therefore if you earn over £260,000, for every £ of adjusted income over £260,000, your annual allowance will be reduced by £1 to a minimum of £10,000.
Some people choose to access their money purchase pension savings flexibly. If you do this, though, your Annual Allowance entitlement is reduced, known as the Money Purchase Annual Allowance (MPPA). The MPPA is currently £4,000, but it will be increased to £10,000 as part of the reform.
There is currently a limit on the tax relievable pension savings that an individual can benefit from throughout their lifetime, known as the Lifetime Allowance. This is currently £1,073,100, but from 6th April 2023 it will be removed as part of the incentive.
When people eventually begin to receive their pension benefits, they may be entitled to a tax-free lump sum, known as a Pension Commencement Lump Sum. The maximum amount that most individuals can currently claim is 25% of their available lifetime allowance at the time of receiving the sum. Given that the lifetime allowance is ending from 6th April, there will be an upper monetary cap of £268,275. This is 25% of the current Lifetime Allowance, except where previous protections apply.
Changes are also set for the taxation of the Lifetime Allowance excess lump sum, serious ill-health lump sum, and defined benefits lump sum death benefit, where they are currently subject to a 55% tax charge above the Lifetime Allowance, to taxation at an individual’s marginal rate.
The above is general information regarding the reform of pension tax policies. If you have any queries about this topic, please contact a member of the team directly on 020 7625 4545 or email firstname.lastname@example.org.
Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.
You can find the rest of our blogs here!