In March’s Spring Budget, the government announced the removal of the pension lifetime allowance (LTA). This allowance, set at £1.073m, capped the amount you could build up in pension benefits while still enjoying full tax benefits. But as of 6 April 2023, the new rules mean you’ll be able to 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’s intention is to dissuade older, better-paid workers from retiring early – especially senior staff in the NHS. But the removal of the LTA is also likely to benefit anyone who’s already accumulated a pension pot of over £ 1.073m, or whose contributions are on track to exceed this amount.

The LTA is likely to benefit anyone who’s on track to accumulate a pension pot of over £1.073m

Who will benefit from the pension rule changes?

For most pension savers, the scrapping of the annual and lifetime allowance won’t make much difference.

However, there are a significant number of people who will benefit. In the tax year 2019/20, over 42,000 people breached their lifetime allowance which, at the time, could have left them open to a large tax bill.

If you’re lucky enough to have over £1 million in your pension or are on track to reach that figure before you retire, you might recognise one of the following scenarios – each of which will be affected by the changes.

– You’re limiting the amount you contribute to your pension because of your annual or lifetime allowances. The proposed changes mean your annual contribution can be a maximum of £60,000 from 2023/24. The overall size of your pension pot will no longer trigger a tax liability.

– You were close to the LTA limit and were worried the effects of compounding would take you over. The scrapping of the LTA means there won’t be a tax penalty if your pension continues to grow above the previous limit.

– You’ve stopped your pension contributions because you didn’t want to hit the lifetime allowance. The new rules mean you’ll be able start paying in again. Your new maximum, annual tax-free contribution allowance will be £60,000.

– You’ve avoided adding to your pension in the past and have amassed significant savings elsewhere. As before, you’ll be able to carry forward up to three years of tax relief in a single tax year. Because of the proposed increase in the annual allowance, this means you’ll be able to pay up to £180,000 into your pension in a single year (£60,000 in 2023/24, plus £40,000 for each of the previous three tax years). This could save you up to £81,000 in tax if you’re a higher-rate taxpayer.

– You want to reduce the inheritance tax (IHT) your beneficiaries will be liable for. The new rules mean you can save as much as you want into a pension pot, subject to the annual limit of £60,000. Your beneficiaries won’t pay any inheritance tax on it – as long as you die before age 75. If you die after 75, whilst there’s no IHT to pay, your heirs will face income tax charges based on their personal allowances. To put this into context, NFU Mutual calculates that if you were to save the maximum annual allowance of £60,000 in a pension from April of this year, and a further £60,000 for each of the next ten years, assuming 4 percent growth after charges compounding monthly, you could build a pot of £812,298. This would provide an inheritance tax saving of up to £324,919.

Though there are now several new opportunities for pension savers, the proposed changes – included within the Finance Bill – are yet to become law. The Bill is expected to pass in around July 2023. 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.

With the possibility of a change of government in the next couple of years, it's worth bearing in mind that this policy may be reversed

What’s the catch?

Aside from the fact the Finance Bill has yet to become law, there is one major caveat to all of this. With a general election due within the next couple of years and the possibility of a change of government, it’s worth bearing in mind that this policy may be reversed. Making accelerated payments into your pension now may mean you breach any reimposed allowances and face tax charges.

Bear in mind, too, that if you earn above a certain amount each year (£200,000 of “threshold income” or £260,000 of “adjusted income”), your tax-free annual allowance will be ‘tapered’ down to a lower level. This means it will gradually reduce, by £1 for every £2 above the threshold, down to a minimum of £10,000.

A financial planner can help you plan for all of this. They’ll help you make best use of the tax-saving opportunities available to you in the near-term, whilst putting a plan in place should this decision be reversed in the future.

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 in the Spring Budget, 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.