The Spring Budget 2023 included several changes that impact pension savings – and how you take your pension when you retire.

While some of these changes have been introduced to encourage professionals to stay in the workplace, they will also have an impact as people take their retirement benefits. In this article, we will discuss the key changes affecting pensions and what they might mean for you.

The abolishment of the LTA means you can now save as much as you want in your pension pot without worrying about a tax penalty

The end of the Pension Lifetime Allowance (LTA)

The most significant change affecting pensions in the Spring Budget is the scrapping of the Pension Lifetime Allowance (LTA), which had stood at £1,073,100. The LTA represented the maximum amount you could build up in pension benefits, while also enjoying full tax benefits.

Though the LTA had been expected to increase, its complete removal means there is no longer a cap on the amount of money you can save in your pension pot.

Previously, exceeding the LTA meant paying a hefty tax charge on the excess amount. With the abolishment of the LTA, you can now save as much as you want in your pension pot without worrying about a tax penalty.

Introduction of a cap on the 25% tax lump-sum

Due to the scrapping of the LTA, a cap is now in place on the 25% tax-free lump sum you can take from your pension at age 55 (or age 57 from 2028).

This means the maximum tax-free lump sum you can take is £268,275. In reality, it’s the same limit that was in place before, given that it’s 25% of the old LTA limit of £1,073,100.

Because the LTA has fallen over the past decade, some people have ‘protection’ for an LTA that’s higher than the recently-scrapped limit – and therefore a potentially a higher tax-free lump sum than they would receive under new rules. If you’re in this position, it’s especially important to seek advice before you increase contributions to your pension.

Annual Allowance for pension contributions is increasing

The Spring Budget has also raised the annual allowance for pension savings from £40,000 to £60,000. The annual allowance is the maximum amount you can contribute to your pension each year, and still enjoy full tax benefits.

This increase means that you can now save up to £60,000 every year without incurring a tax charge.

Money Purchase Annual Allowance (MPAA) Increased

The Money Purchase Annual Allowance (MPAA) has also been increased from £4,000 to £10,000 per annum. The MPAA is the amount of money you can put into your pension pot tax-free after you’ve started to access it.

This change aims to encourage people to save more for retirement (which they might do by returning to the workplace) by allowing them to contribute more money to their pension each year.

Seek advice about how these changes could affect you

The scrapping of the Pension Lifetime Allowance, and the increases to the annual allowance and MPAA, are designed to discourage professionals from retiring early – or encourage them back into the workplace.

Whatever your circumstances, it’s essential to seek professional advice before making any decisions. A conversation with a financial planner will enable you to make informed choices and get maximum benefits from these changes.

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