Changes to how pensions are taxed and what it means for you
One of the big headlines from the Chancellor’s spring budget for last year was changes to the tax limits on pension savings. To make sure you’re updated on what this might mean, we’ve created a quick summary of the terms and changes.
The Annual Allowance
The Annual Allowance is the amount of money you can save in pension benefits each year without incurring a tax charge. This amount has remained at £40,000 since 6 April 2016. The Chancellor announced this cap would be rising from £40,000 to £60,000 from 6 April 2023, which has been implemented.
The Tapered Annual Allowance
The Tapered Annual Allowance is the point at which the Annual Allowance is reduced for high-income individuals. Until 5 April 2023, affected members had their Annual Allowance reduced by £1 for every £2 their ‘adjusted income’ is over £240,000. This continues until the minimum allowance is reached, which was £4,000 until 5 April 2023.
The level of adjusted income needed for the Tapered Annual Allowance to apply increased as at 6 April 2023 from £240,000 to £260,000, with the minimum allowance also increasing from £4,000 to £10,000.
Money Purchase Annual Allowance
When you start drawing money from a defined contribution pension, the amount you can pay into any other defined contribution pensions without paying a tax charge is limited by the Money Purchase Annual Allowance.
The Money Purchase Annual Allowance has also increased from £4,000 to £10,000, to keep it in line with the minimum Tapered Annual Allowance.
The Lifetime Allowance
The Lifetime Allowance is the maximum amount an individual can take from all their registered pension schemes without incurring additional tax charges. This does not include the State Pension. A 55% tax charge is applied to amounts above this threshold withdrawn as a lump sum, or 25% if paid as a pension. The Lifetime Allowance for the 2022/23 tax year was £1,073,100.
The budget removed the tax charges for amounts exceeding the Lifetime Allowance for the 2023/24 tax year, and the Lifetime Allowance will be abolished completely from 6 April 2024.
Pension Commencement Lump Sum (PCLS)
When you start drawing your pension you can choose to receive a tax-free lump sum payment of up to 25% of your pension. The maximum amount you can claim tax free is currently £268,275 (which is 25% of the current Lifetime Allowance).
The PCLS amount will be frozen at £268,275, even though the Lifetime Allowance is being removed.
The Chancellor of the Exchequer presented his Autumn Statement 2023 in November last year.
Here is a summary of what he spoke about in relation to the pensions industry:
The State Pension will increase by 8.5% to £221.20 a week in April 2024, worth up to £900 more per year. The ‘triple lock’ has been honoured.
There will be a consultation on ‘pot for life’ that will give workers the right to nominate the pension scheme to which their employers’ pay contributions. The hope is that this will reduce the amount of lost pots or small pots and allow simpler admin procedures if it goes ahead.
Consolidation of DC pension funds and some DB with the claim that by 2030, the majority of workplace pension savers would be in funds of £30bn or larger, and by 2040, the LGPS would be in pools of £200bn or more.
There’ll be another consultation this winter on options for DB schemes to consolidate into a new statutory vehicle run by the Pension Protection Fund.
The Government said that it would commit £250m to two successful bidders under the Long-term Investment for Technology and Science (LIFTS) initiative. This will create new investment vehicles tailored to the needs of pension schemes, seeking to generate over a billion pounds of investment to support the UK's most promising science and technology businesses. The Government also confirmed its intention to establish a Growth Fund within the British Business Bank (BBB), to give pension funds access to investment opportunities in the UK’s most promising businesses.
Transfer regulations
Due to the increased risk of pension scams, new rules came into place on 30 November 2021 that require trustees and pension providers to prevent pension transfers if they believe the circumstances to be suspicious. To help protect you from pension scams, this new legislation now allows pension providers to express their concerns about your transfer under two categories, red flags or amber flags.
Red flags
If your pension provider identifies any red flags while carrying out additional checks, they can now prevent the transfer from going ahead. This helps to protect your pension benefits from being lost.
Amber flags
This means you could be at risk of being scammed, so you’ll be referred for a free Pension Safeguarding appointment with MoneyHelper.
Examples of when either a red or amber flag may be raised are, when a member is:
Not providing sufficient information in relation to the transfer when requested to do so.
Being given financial advice from a company without the appropriate regulatory permissions.
Receiving an unsolicited request to transfer funds from their pension or feeling pressured to do so.
Wanting to transfer to a receiving scheme with high-risk, unregulated investments and/or which charges fees that are unclear or noticeably high.
It’s important to remember that these regulations have been introduced to make transfers safer. The extra checks involved may also make transfers slower, so please be patient if you’re going through the process.
If the Trustee Board thinks the circumstances of your transfer look suspicious, they may pause or terminate it until they’ve seen more evidence that it’s valid.
We hope that, if you’re making a transfer, there won’t be any reason for suspicion and that you won’t be affected by the new rules. If you are, it’s important to remember that they’ve been introduced to reduce the risk of pension scams and keep your money safe.
Please note that if you are considering leaving the Scheme and taking a transfer value, we suggest that you consult an independent financial adviser before taking any action.
