According to recent research from Aviva, 44% of 55-64 year-olds plan to move into semi-retirement before the age of 65. This allows them to draw on their pension savings while continuing to work part-time. Last week, however, in the Spring Budget announcement, Jeremy Hunt unveiled plans to incentivise a longer working life for individuals approaching retirement age. The new measures being introduced will take effect from 6th April 2023, and will allow individuals to build their retirement savings further, whilst also contributing to restoring the UK’s economy and delivering much-needed services. Within this, it is hoped that the changes will incentivise high-skilled older workers, such as NHS doctors to continue working .
What is changing about pensions?
There are several factors of the UK’s current pension scheme that are changing from 6th April 2023…
1. Annual Allowance
This is the maximum amount of pension savings that an individual is allowed to save each year with tax relief. At the moment, the Annual Allowance is £40,000, and will increase to £60,000 going forward.
2. Money Purchase Annual Allowance
Some individuals choose to access their money purchase pension savings flexibly. The Money Purchase Annual Allowance is a reduction to the Annual Allowance for people who choose to do this, and it will be increased from £4,000 to £10,000.
3. The Tapered Annual Allowance
People with income above a certain threshold are subjected to a reduced Annual Allowance, known as the Tapered Annual Allowance. The current threshold for this is £240,000, but it will imminently be increased to £260000.
4. Lifetime Allowance
At the moment, there is a maximum amount of tax relievable pension savings that an individual can benefit from throughout their life. It is currently £1,073,100, but will be removed under the new measures, meaning that no one will face a lifetime allowance charge.
5. Pension Commencement Lump Sum
Some people may be entitled to a tax-free lump sum when they begin to receive their pension benefits, known as a Pension Commencement Lump Sum. The maximum amount that most individuals can currently claim is 25% of their available lifetime allowance at the time of receiving the sum. Going forward, the upper monetary cap will be £268,275, which is 25% of the current Lifetime Allowance, except where previous protections apply.
There will also be changes to the taxation of the Lifetime Allowance excess lump sum, serious ill-health lump sum, defined benefits lump sum death benefit, where they are currently subject to a 55% tax charge above the Lifetime Allowance, to taxation at an individual’s marginal rate.
Although the government has introduced the new pension tax policies to encourage the population to work into older age, it is uncertain how long this would be sustained under a change in government. It’ll be interesting to see how the policy plays out over the next few years.
If you have any questions about any issues covered in this article, or would like further advice about your finances, please contact us on 023 8033 2733
You can find our full Spring Budget overview here!