I appreciate it is early days but can you explain the key pensions measures from the Budget and how they will affect people? And what happens if Labour comes in and reverses it all?

Stephen

Tom Selby, AJ Bell Head of Retirement Policy, says:

Jeremy Hunt’s first Budget as chancellor delivered a series of big changes for pensions taxation which will boost retirement savings allowances for millions of people.

The headline measure was around the lifetime allowance, which currently controls the total value of pension benefits someone can build up without being subject to a tax charge over their lifetime. As things stand today, if you breach the lifetime allowance, which currently stands at £1,073,100, you will pay a lifetime allowance charge on the excess. This charge will be 25% if the excess is taken as income and 55% if taken as a lump sum.

LIFETIME ALLOWANCE WIPED OUT

However, from 6 April 2023, the lifetime allowance charge will be reduced to 0%, with the government eventually intending to scrap the lifetime allowance altogether. This will dramatically simplify pensions saving decisions for those close to or over the lifetime allowance and, crucially, remove the disincentive to take investment risk for anyone worried about being hit with a lifetime allowance charge as a result. As part of the changes, the maximum tax-free lump sum someone can take will be held at £268,275 – a quarter of the current £1,073,100 lifetime allowance.

One key thing to note: if by crystallising your pension (or part of your pension) you will have used up all your lifetime allowance, it makes sense to hold off doing so until 6 April if you can. If you crystallise your pension – such as by taking your tax-free cash or entering drawdown – before 6 April, your fund will be tested against the lifetime allowance and you could still be hit with a tax charge as a result.

If you have one of the forms of lifetime allowance ‘protection’ introduced since 2006, these will be honoured under the new reforms. This means if, for example, you have a tax-free cash entitlement higher than £268,275, you will be able to keep it. What’s more, you will be able to top-up contributions from 6 April 2023 without losing any protected tax-free cash entitlement you have.

ANNUAL PENSION LIMITS LIFTED

As well as setting out his intention to scrap the lifetime allowance, the chancellor also announced significant boosts to pensions annual allowances. These govern how much can be paid into a pension each tax year before an annual allowance charge is levied.

The main annual allowance, which covers personal contributions, employer contributions and tax relief, will rise from £40,000 to £60,000 from 6 April this year. In addition, the minimum level of the tapered annual allowance, which affects very high earners, will increase from £4,000 to £10,000.

At the same time, the money purchase annual allowance, which is triggered when you flexibly access taxable income from your retirement pot, will rise from £4,000 to £10,000.

If you breach any of these annual allowances, a tax charge will be applied to the excess designed to remove the upfront tax relief your contribution received.

WHAT IF THE PLANS ARE REVERSED

Lots of people are already worrying about whether Labour could reverse this decision if they win the next general election. Some might even be thinking about taking decisions with their pension to mitigate against this risk.

Second-guessing what a politician may or may not do if they win power is a fool’s game and certainly isn’t something you want to be hanging your financial future on. There is also a risk that in trying to dodge something which is entirely uncertain, you end up making a poor financial decision. We have no idea what a Labour reversal of this policy would look like or if they would follow through with it, so rather than being distracted by politics, deal with the tax rules as you find them and stay focused on your long-term retirement strategy.

We are still waiting for all the rules around these changes to be finalised, so expect more updates in due course. In the meantime, if you have any questions about this or anything else, send them to the usual email address.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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