A constraint on pension savings
The lifetime allowance was first introduced in 2006 at £1.5m, after which it increased each year before being reduced between 2012 and 2016. Since 2016 the LTA increased each year by inflation, taking it to £1,073,100. This meant that individuals above the limit could have faced a tax charge of 25% on the value above the limit or as high as 55% if withdrawn as a lump sum.
Speculation emerged before the 2023 Budget that the level would rise to £1.8m. The hope was this would encourage well-off workers to stay in or return to work without being unduly penalised with constraints on growing their pensions.
Now it has been abolished altogether – while the annual allowance for pension contributions has been raised by 50% to £60,000.
So what should investors do now? Rather than take today’s events as a cue to do nothing, it is more important than ever for you to ensure your retirement plans can take advantage of the extra scope for growth. You should also ensure that any plans you have to pass on assets to your family reflect the new pension environment.
Key details from the 2023 Budget
There is a lot to process from today’s Budget but some of the key details include:
- The government will increase the Annual Allowance from £40,000 to £60,000 from 6 April 2023.
- Individuals will still be able to carry forward unused Annual Allowances from the three previous tax years.
- The government will increase the Money Purchase Annual Allowance from £4,000 to £10,000 and the minimum Tapered Annual Allowance from £4,000 to £10,000 from 6 April 2023.
- The adjusted income threshold for the Tapered Annual Allowance will also be increased from £240,000 to £260,000 from 6 April 2023.
- As stated above, the government will also remove the Lifetime Allowance charge from 6 April 2023, before fully abolishing the Lifetime Allowance in a future Finance Bill.
- The maximum Pension Commencement Lump Sum for those without protections will be retained at its current level of £268,275 and will be frozen thereafter.
What investors should do now
Like many aspects of financial planning nuance is important, and getting the right advice and guidance is crucial.
Investors should ensure they don’t regret taking more control of their retirement plans and take the opportunity now to speak with an expert about the best course of action for your retirement plans.
Those thinking of crystallising their pensions before tax year end may wish to check if this is the best course of action, and those who were put off from contributing to pensions due to the threat of an LTA tax charge may want to reconsider the benefits.
Although we don’t have all the details yet, at first look these changes make pensions an even more attractive vehicle for long-term investment and passing wealth to future generations. Pensions are currently outside of your estate for IHT and so if passed on as part of a wider estate planning approach can be very tax efficient.
At Netwealth, our goal is to help investors and those planning for their future to do so effectively and efficiently. Our expert financial planners can help you identify the type of retirement you want and the steps you need to take to get there.
You can use our powerful online planning tools (which we are updating to reflect the new LTA changes) to help bring your plans to life by visualising the different financial variables for a healthy retirement. These are free to all registered users and if you have any questions you can talk to one of our advisers whenever it suits you.
Please note, the value of your investments can go down as well as up.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions.