Jeremy Hunt’s spring Budget focused on the government’s aims to halve inflation and reduce public debt while building long-term, sustainable, and healthy economic growth.

Alongside investment incentives, the chancellor announced extensions to the energy price guarantee and the temporary 5p fuel duty. 

There were also some big surprises for those in or approaching retirement.

Keep reading to find out more about three key pension changes and what they might mean for you.

1. The Lifetime Allowance will be abolished

The number of UK workers taking early retirement soared during the pandemic. 

As part of his plan to encourage some of those recent retirees back to work, Jeremy Hunt has opted to scrap the Lifetime Allowance (LTA).

Introduced in 2006, the LTA is the amount you can withdraw from the pensions you hold during your lifetime without those withdrawals being subject to an additional LTA charge.

The limit stood at £1.5 million in 2006 before peaking at £1.8 million. Following the chancellor’s announcement, it will nominally remain at its current level of £1,073,100 for the 2023/24 tax year before being officially abolished in April 2024.

Importantly, though, the charge for exceeding the LTA will no longer apply (or will drop to 0%) from 6 April 2023 onwards. The LTA charge had stood at 55% for excess funds that you took as a lump sum and 25% if you accessed the additional amount as income.

This greatly increases the size of the tax-efficient pension pot you can amass.

2. The Pensions Annual Allowance has increased

To further encourage tax-efficient pension saving, Jeremy Hunt also chose to increase the Annual Allowance. This is the amount that you can save into a pension each year while still receiving tax relief on your contributions.

Tax relief is applied automatically at the basic rate, meaning that a £100 increase in your contributions costs you just £80.

As a higher- or additional-rate taxpayer, you can claim an additional 20% or 25% respectively, through your self-assessment tax return. A recent PensionsAge report confirmed that between 2016/17 and 2020/21 a massive £1.3 billion in potential tax relief went unclaimed by high-earners.

If you are a higher- or additional-rate taxpayer, be sure to make the most of this new Annual Allowance and claim the tax relief you are due.

3. Even your reduced allowance is likely to have risen

If you are a high earner, or if you have already flexibly accessed pension benefits, you might already be subject to a reduced Annual Allowance.

If so, your reduced allowance could also have increased.

Money Purchase Annual Allowance

If you are considering, or already in, a form of phased retirement, you might be subject to the Money Purchase Annual Allowance (MPAA). 

This limits the tax-efficient contributions you can make if you are already receiving a pension via some flexible options introduced by Pension Freedoms legislation.

Triggering the MPAA previously reduced your Annual Allowance to just £4,000. From April 2023, the new MPAA stands at £10,000.

Tapered Annual Allowance 

The Tapered Annual Allowance (TAA) applies to higher earners and reduces your Annual Allowance by £2 for every £1 your income exceeds a specific amount. This amount is known as your “adjusted income”.

Tapering was previously applied until your allowance was reduced to a minimum of £4,000. 

Jeremy Hunt used his spring Budget to increase this minimum to £10,000 from April 2023. 

The adjusted income threshold will also rise from £240,000 to £260,000 from 6 April 2023. The “threshold income” amount, though – the level at which the test for tapering is applied – remains at £200,000. 

A key part of the chancellor’s plan to keep experienced employees working, these changes will take more people out of the taper.

Jeremy Hunt’s announcements increase the tax-efficient pension savings you can make 

The chancellor’s changes are intended to encourage early retirees back into work while ensuring current employees stay working for longer.

Abolishing the LTA and increasing tax-efficient pension allowances greatly increases the amount you can save in your pension. This could make a huge difference to your retirement plans. 

Contrary to the government’s hopes, it might even mean you can afford to retire earlier than planned.

It’s also worth noting that your pensions might form an important part of your estate planning. This is because unused pension pots can be passed on tax-efficiently on death, in some circumstances. 

Be sure to speak to us if you’d like to consider using your pension for inheritance purposes.

Get in touch

If you’d like to discuss how the Budget changes might affect your long-term retirement planning, our Chartered Financial Planners can help. If you have any questions, please get in touch and speak to us today.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.