Pension planning opportunities post Budget
The Budget delivered by Jeremy Hunt on 15th March 2023 had a strong focus on pensions, with a considerable volume of analysis and reporting thereafter, and we want to identify the major changes and the opportunities this may now present.
In brief, he announced a removal of the pension lifetime allowance (LTA) and the ability to increase annual pension contributions, subject to the tapered annual allowance restriction for higher earners (earnings between £240K – £360K), with effect from 6th April 2023.
What opportunities does this present?
Pension Lifetime Allowance removal and Annual Allowance increase
By removing the current pensions lifetime allowance (£1,073,100) and raising the annual contribution limits, this represents an opportunity for many to revisit or accelerate their future lifestyle spending ability.
Assuming you are an individual not caught by the tapered annual allowance, you now have the opportunity to increase your annual contributions from £40,000 to £60,000.
In future tax years (assuming no further pension changes) the opportunity to maximise previously unused pension contributions (using pension carry forward) will also increase as a result of this.
Increased tax reliefs available from 6th April 2023
Company Directors who had not previously maximised employer or personal contributions, perhaps due to pension lifetime allowance concerns, may now be well placed to take advantage of these changes to increase their current pension provision (subject to ensuring Corporation tax relief of income tax relief is considered and maximised). This may be particularly relevant and beneficial with the increased Corporation tax rate of 25% in the new tax year.
For those individuals earning over £100K or £125K, the increased annual allowance presents an opportunity to benefit from either 60% or 45% Income Tax relief in the new 23/24 Tax year when Income tax and allowances are increased.
Current pension holders of Enhanced or Fixed Protection
Individuals who hold a valid enhanced protection or any valid fixed protections, where this protection was applied for before 15 March 2023, and a certificate or reference number subsequently issued, from 6 April 2023 will now be able to accrue new pension benefits, join new arrangements or transfer without losing this protection. They will also keep their entitlement to a higher tax-free cash lump sum.
Tax-free cash
We are awaiting further detail and confirmation that your limit on tax-free cash from a pension will now be £268,275 (assuming no enhanced or fixed pension protection, see above), resulting in benefits drawn from a pension in excess of £1,073,100 being all subject to income tax. This could still be acceptable to those benefiting from several tax relief and with an eye on making their pension multi-generational.
As with any pension funding analysis, it will be key to calculate the expected net benefit to you of making significant contributions. For example, look at the reliefs available on the contributions and then contrast with when and how the pension may be used and taxed.
Additionally, if the current compelling Inheritance Tax benefits of pensions remain, this could be another factor to consider for funding purposes.
Labour response and announcement
We’re not ignoring the Labour party’s immediate response to these changes and their proclamation that they will reverse these changes (except for any NHS workers. Would that really be possible?), in spite of providing some examples of tax savings that were, by their own admission, incorrect!
However, we always recommend that you proceed based on current tax legislation and not some forecast on the next election and the possible tax changes that could result.
If you have any questions about your pension planning, please contact us by completing the form below or calling on 01825 76 33 66.
