At the Spring Budget in March 2023, The Chancellor Jeremy Hunt announced that he was going to abolish the Pension Lifetime Allowance. Rather than increase the threshold, as many had predicted he would, the Chancellor removed the cap completely. The change came into effect in April 2023.

In a budget focused on getting the UK economy growing, the removal of the LTA is intended to help prevent people from retiring early, particularly senior staff within the NHS, due to the fear of being heavily taxed on their pension contributions above the allowance.

Now that the dust has settled following The Budget, we examine what the changes mean for those saving into their pension, and for those looking to access their pension savings.

What is the Pension Lifetime Allowance (LTA)?

The Pension Lifetime Allowance is the maximum amount an individual can accumulate in their pension pots throughout their lifetime without incurring additional tax charges. It covers all private and workplace pensions, including final salary, personal and stakeholder pensions. However, overseas pensions and the state pension are excluded.

Previous LTA Limits, Contributions and Withdrawals.

Before the changes, the Pension Lifetime Allowance was set at £1,073,100 for the tax year 2022/2023. This meant that individuals with pension savings exceeding this threshold were subject to additional tax charges upon retirement. Previously, people would be taxed at 55% on any savings they withdrew from the pension above the threshold.

However, for those looking to withdraw from their pension pot, the maximum cash sum that can be taken from a pension without being subject to income tax will remain limited to 25% of the previous lifetime allowance (£1.073m), a maximum of £268,275. The one exception is for those who protected and capped their pension pots before 2016, when higher allowances were in place.

For those saving into their pension, from April 2023, the annual pensions contributions cap (where they receive tax relief), which has been frozen for the past nine years, has risen from £40,000 a year to £60,000.

Similarly, Jeremy Hunt also announced an increase to the money purchase annual allowance. People contributing to their defined contribution pensions after they have started taking an income from it can now invest £10,000, up from £4,000.

The threshold for high earners has also increased, meaning they can save additional funds into their pension pots each year. The current annual allowance starts to be tapered for £1 for every £2 over £240,000 until it reaches just £4,000. Following the Budget, the tapering will now start at £260,000 and will be capped at £10,000.

What do the changes mean for you?

For many of our clients, the changes will bring several benefits, including:

Increased Flexibility: The removal of the LTA provides individuals with additional room for pension savings. This allows for increased flexibility in retirement planning and will enable individuals to contribute more to their pensions without incurring tax charges. For those people who love their jobs, it will allow them to continue working and not be forced into retirement for fear of incurring a significant tax penalty on their savings.

Tax Efficiency: People who have been cautious about contributing to their pension pots due to the LTA can now maximize their investments in a tax efficient way. Pensions are the most tax efficient way of saving, and the removal of the LTA, along with the increase in the tax free pensions cap, means more people can save for their futures in a tax efficient way.

Planning Opportunities: The increase in the lifetime pension allowance opens up new planning opportunities for high-net-worth individuals. It provides options for long-term financial strategies such as reviewing retirement plans, reassessing pension contributions, and exploring tax-efficient investment vehicles. It also means that people who had stopped saving into their pensions can now start again!

The removal of the LTA and the other changes announced in the Spring Budget will provide opportunities for our clients. As always, for specific advice on your retirement strategy, please speak with your financial adviser.