There were some new pension planning opportunities as a result of Jeremy Hunt’s March Budget, which prompted a significant number of questions and enquiries. Therefore, we wanted to focus this article on some common themes that arose.
Frequently asked questions about pensions, as a result of the March 2023 budget
- If I’d stopped contributing to my pension because of concerns about exceeding the pension lifetime allowance, should I now recommence contributions?
Quite possibly yes, but it depends!
If you are a higher or additional rate taxpayer or you earn between £100K – £125K, the income tax relief available on contributions is very compelling and attractive. Additionally, if your employer or company that you own can make contributions (and receive Corporation Tax relief), again this would be a good reason to reconsider.
Its important to “follow the money” and consider not just the Income Tax relief, but also your likely Income tax rate if and when you come to withdraw funds. Furthermore, if you have a current Inheritance Tax challenge, accumulating additional funds inside a pension, which ought to be free of Inheritance Tax, can be another reason to recommence contributions.
- As the pension lifetime allowance (LTA), £1,073,100 has now been removed, will I be entitled to a 25% tax-free cash lump sum on any sum in my pension?
The Budget announced a headline limit on tax-free cash of £268,275 (£1,073,100 x 25%), unless you have applied for some form of historic increased pension lifetime allowance, in which case, you will retain an entitlement to tax-free cash greater than £1,073,100
- How does this tax-free cash limit apply if I have Defined Benefit/Final Salary and Defined Contribution/Personal pensions?
You will be limited to tax-free lump sums as outlined above.
If you do have a combination of pensions, its really important to consider and calculate from where and how you elect to take any lump sums. Frequently we see lump sums taken from Defined Benefit/Final Salary pensions that, assuming normal life expectancy, are relatively poor value for money i.e. you are giving up too much income for a tax-free lump sum. Don’t be swayed by some headline big tax-free cash numbers!!
- Will this tax-free cash limit increase each year?
The Budget document stated this limit will be “frozen”, so seemingly not.
- If I have more than the current pension LTA in my pension, what should I do?
There may be a good reason for you to transfer any excess (amounts over and above the current pension LTA of £1,073,100) into an income drawdown arrangement. It’s all about the taxation of your death benefits should anything unexpected happen to you before reaching aged 75. This is a relatively complex aspect but one that definitely needs to be considered.
- Should I wait for the election to see if Labour are elected and then if they do reverse this change?
You’ll note there are already two “if’s” in the question!
Labour announced they would reverse this change, then announced a possible NHS exemption, but no detail on who, within the NHS would be exempt (Doctors, Consultants, Senior Nurses, NHS Accountants), so let’s all be careful about making too many assumptions.
Arguably, if Labour are elected and then announced a retrospective change in tax rates i.e. you recommence pension contributions, Labour are elected and then reintroduce a pension LTA, which triggers a pension LTA tax charge, this could be destructive to the overall tax system. The future repercussions of an opposition party getting elected and then applying different tax rates to individuals whilst they weren’t in power, doesn’t bear thinking about.
We are making no predictions or providing false assurances, but we would definitely be considering this now rather than simply waiting and deferring.
If you have a question about your pension, please either complete the form below or give us a call on 01825 76 33 66.
