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What the Spring Budget Pension Changes Might Mean For You

How High Earners Who Have Pension Assets Under the Lifetime Allowance Can Benefit From the Changes.



Wednesday’s pension announcements were certainly unexpected.

CHANGES TO THE LIFETIME AND ANNUAL PENSION ALLOWANCE


The Lifetime Allowance, which is the maximum amount (currently £1,073,100) that you are able to build up in pensions before you suffer additional tax on the surplus, is to be scrapped.

In addition, the Annual Allowance, which is the maximum amount that you and your employer can pay into your pension tax-efficiently each year will increase from £40,000 to £60,000.

The Shadow Chancellor has already stated that Labour will reverse the decision to scrap the Lifetime Allowance if they come into power on the basis that it would only benefit the richest 1%.

So, will any of this affect you?

Please note that our examples below focus on those people who don’t currently have a Lifetime Allowance “problem”. If you already have assets approaching, or in excess of, the Lifetime Allowance or have some form of Lifetime Allowance protection such as Fixed Protection, your options may be complex. We will happily discuss this with you on an individual basis.

NOT IN THE 1%?

The reality is that the vast majority of people are not able to get anywhere close to paying £40,000 p.a. into their pensions, so the increase to £60,000 will make no difference to their pension contributions.

Similarly, most people will not be in a position to build up over £1m of pension assets, so a removal of the Lifetime Allowance will make no practical difference to their finances either.

IN OR APPROACHING THE 1%

This is where careful planning is really needed. Let’s look at a few examples.

THE HIGH EARNER

Let’s imagine that you are 50 and earning £310,000 p.a. in a senior employed position.

Because the Tapered Annual Allowance has severely hampered your ability to save into a pension over recent years, the Lifetime Allowance probably isn’t your concern as your pension fund won’t have had a chance to get big enough.

A few years ago, you were limited to £10,000 p.a. of contributions when the tapering started at £150,000 and for the 2022/23 tax year are currently restricted at just £5,000 p.a. This is because your Annual Allowance is reduced at a rate of £1 for every £2 of income above the adjusted income threshold, currently £240,000. Your income is £70,000 above this, meaning that your allowance is reduced by £35,000. As the allowance is currently £40,000, this leaves you with just £5,000 that you can pay in.

You may well have negotiated some extra salary from your employer in lieu of pension contributions or will be exceeding the Annual Allowance each year and suffering an annual tax charge.

The 2023/24 changes will leave you with a much higher allowance as the tapering will start at £260,000. You’ll lose £25,000 of the new standard allowance of £60,000, leaving you with an allowance of £35,000 p.a.

That’s a big jump from this year and could well mean that you can fully benefit from your employer pension arrangements again without a tax charge.

THE EVEN HIGHER EARNER

Let’s imagine that you earn £360,000 or more.

You are currently limited to putting £4,000 p.a. into your pension. This is because the current tapering gives £4,000 p.a. as the minimum contribution level, which applies once your income exceeds £312,000.

From next tax year the tapering will still take you down to the minimum because the new £60,000 allowance will be lost at a rate of £1 for every £2 of income over the £260,000 but the new minimum will be £10,000.

In the grand scheme of your finances, a jump from £4,000 to £10,000 probably won’t make much difference, but it’s an increase nevertheless!

THE HIGH BUT NOT QUITE SO HIGH EARNER

Let’s imagine that your income is £150,000 and that whilst you spend most of your income, you’ve received an inheritance which means that you can move some money into your pension if it makes sense.

You’ve got the full £60,000 allowance available to you because you are not affected by the taper.

If you don’t make any pension contributions, the top £50,000 of your income is going to get well and truly clobbered.

This is because not only will you lose your tax-free Personal Allowance on your income between £100,000 and £125,140 (which gives an effective rate of tax of 60%) but you’ll also pay 45% income tax on your income from £125,140 to £150,000. This is because the 45% tax band has been widened in 2023/24 to drag more people into the additional rate tax net.

The end result of that is that your top £50,000 of income will suffer a colossal £26,271 of tax, leaving you with just £23,729. In other words, a 52.5% tax charge.

So, you have a choice. Do you want £23,729 in your pocket or £50,000 in your pension fund?

HELP IS AT HAND

It’s complicated.

If you are a high earner who would still like to contribute to your pension or are someone who already has pension assets at or above the Lifetime Allowance and are unsure what to do, please give us a call on 020 3488 9505. We have numerous clients who are affected by these changes in a variety of ways and, with this experience, we can also help you to make the right decisions.



The value of your investments can go down as well as up, so you could get back less

than you invested.

Tax and Estate planning is not regulated by the Financial Conduct Authority.


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