In March 2023's Spring Budget, the government announced the removal of the pension lifetime allowance (LTA). Previously set at £1.073m, the LTA capped the amount you could save in pension benefits while still enjoying full tax relief. However, as of 6 April 2023, the new rules mean you can now save an unlimited amount into your pension – without worrying about a potential tax charge.

At the same time as scrapping the LTA, the government also increased the annual allowance – the maximum amount you can save tax-free into your pension each year – from £40,000 to £60,000.

This all means that if you’re a high earner, or have significant savings elsewhere, you’ll have the opportunity to put more into your pension – and enjoy significant tax benefits for doing so.

The government introduced these changes to encourage older, higher-earning workers, especially senior NHS staff, to delay retirement. The removal of the LTA also benefits anyone who already has a pension pot exceeding £1.073 million or whose contributions are likely to grow beyond this amount.

From April 2023, you can save an unlimited amount into your pension without worrying about a lifetime allowance tax charge.

Who will benefit from the pension rule changes?

For most pension savers, the scrapping of the lifetime and annual allowances may not have much of an impact. However, there are certain groups of people who are likely to benefit significantly.

For example, in the 2019/20 tax year, over 42,000 people breached their lifetime allowance and faced large tax bills as a result. If you’re fortunate enough to have a pension pot exceeding £1 million or are on track to reach that figure, you might recognize one of the following scenarios:

– You’ve limited your contributions due to annual or lifetime allowances.
From 2023/24 onwards, the annual contribution limit is £60,000, and your pension pot size will no longer trigger a tax penalty.

– You’re worried about compounding growth pushing you over the LTA.
With the LTA scrapped, you don’t need to worry about penalties if your pension continues to grow above the previous limit.

– You’ve stopped contributing to your pension to avoid breaching the LTA.
You can now start contributing again, with a maximum annual tax-free contribution of £60,000.

– You’ve focused on other savings instead of your pension.
You can still carry forward up to three years’ worth of unused annual allowances. With the annual allowance increased to £60,000, this means you could potentially contribute up to £180,000 in a single tax year, saving up to £81,000 in tax if you’re a higher-rate taxpayer.

– You want to reduce inheritance tax (IHT) for your beneficiaries.
The new rules allow unlimited saving into a pension pot, subject to the annual £60,000 cap. If you die before age 75, your beneficiaries won’t pay inheritance tax on your pension savings. After age 75, while no IHT is due, your heirs will face income tax on withdrawals based on their own tax bands. To illustrate, NFU Mutual estimates that contributing the maximum allowance of £60,000 annually for ten years, with 4% growth after charges, could build a pot of £812,298 – resulting in an inheritance tax saving of up to £324,919.

It’s also important to remember that pensions, and any income you take from them, are a form of investment. Their value can go down as well as up and you may not get back the full amount you invest.

Contribute up to £180,000 into your pension in a single tax year by carrying forward unused allowances.

What’s the catch?

While these changes are advantageous for many, there are some caveats to be aware of:

  • Future government policy changes.
    There is always the possibility that the current government could reinstate the lifetime allowance. If you accelerate your pension contributions now, you may risk breaching future limits and facing tax penalties.
  • Tapered annual allowances for high earners.
    If your annual “threshold income” exceeds £200,000 or your “adjusted income” exceeds £260,000, your tax-free annual allowance will taper down by £1 for every £2 above the threshold, to a minimum of £10,000.

It’s always wise to seek advice from a financial planner, who can help you navigate these changes and make the most of the tax-saving opportunities available. They can also assist in creating a long-term plan to safeguard against potential policy reversals.

Amber River financial planning

An Amber River financial planner can help you plan your retirement to ensure it aligns with your aspirations, leaving you to enjoy the lifestyle you want. In addition to advising you on how to optimise your pension pot following the changes, they can also provide comprehensive financial guidance on a wider range of investments and taxes as part of your overall estate and retirement planning.

Amber River has a network of Chartered financial planners, right across the UK. If you want to set up an initial appointment, call 0800 915 0000, or alternatively use our contact form here.

Lifetime allowance Pensions retirement planning