A Spring Forward for Pensions
The Spring Budget announcement posed some significant changes with regards to pensions. From April 2023, those saving into pensions will have more flexibility to increase their level of contributions without the risk of breaching their annual allowance – a notable increase of £20,000 per annum.
The annual allowance is the maximum amount that an individual can save into their pension scheme each year without incurring a tax charge. The variation of the AA in recent years has caused many senior staff to breach it unknowingly and face large tax charges; an issue the NHS in particular has been under pressure to curb.
This change means that many workers who are in the position to save more towards their retirement can do so. Those paying into additional, tax-efficient savings schemes like AVCs now have room to grow their savings even further and protect them against inflation.
The abolition of the lifetime allowance means that, for a number of senior members within the public sector, any potential risk of breaching the LTA has been minimised. As a result, they may wish to review their actions in light of the new announcements.
Tax-free cash has been frozen at 25% of the current LTA (£268,275), but those with enhanced or fixed protection will be able to access a greater tax-free lump sum at retirement.
With the money purchase annual allowance increasing by over 50% to £10,000, those who want to access/have already accessed their pension pots whilst remaining in employment have more freedom to do so.
Higher earners will welcome the AA changes, but middle-lower earners earlier on in their careers can plan with more confidence knowing that any future compounded growth may not be affected by a tax charge.
And notably, the personal allowance remains unchanged from the Autumn Statement, meaning that savers need to be slightly more careful about exceeding their limit. But the new rule changes make pensions an attractive savings vehicle, incentivising workers to put more money away for retirement and take advantage of efficient tax-breaks for their money.
Ultimately, the new budget welcomes a greater scope for people to save towards retirement – but it’s up to employers to communicate pension scheme information and any additional benefits available to their staff through effective retirement education, so they know they’re making the best decisions for their circumstances.