Budget 2023 – What the pension changes mean for you

The recent budget has created some big opportunities for using pensions to save tax.

You will now be able to pay up to £60,000 per year into your pension and save tax, if your earnings are high enough to justify that. For example, someone earning £125,000 could pay £60,000 into their pension and save £29,000 in tax.

For those with pension pots which already exceed £1 million it was difficult to justify paying further pension contributions when pension funds in excess of £1,073,100 were subject to additional tax, “The Lifetime Allowance Charge” or “LTAC”.

Those rules have now been scrapped and there is no additional tax to pay regardless of the size of your pension pot. For anyone whose pension already exceeds the limit, or is likely to in future, there is a window of opportunity to secure your position without paying this additional tax.

The Labour Party have stated that they will reintroduce this pension tax if they form the next government, so all clients who may be affected should take advice now whilst this opportunity exists. The action you need to take will depend on your personal situation so taking advice at an early stage is vital.

Firstly, you need to be over 55 to take any action. If you have a personal pension you would need to draw your tax-free cash now but do not need to start drawing any taxable income. You need to ensure your remaining pension fund is set up in the correct way and your adviser can ensure this is done for you.

If you have a Defined Benefit (“Final Salary”) pension you need to start drawing your pension to trigger this beneficial treatment. This will be a major decision and considerable advice will be needed on the available options.

Another change announced in the budget affects those who have already started drawing a taxable income from their personal pensions. Prior to the budget those people were restricted to annual pension contributions of £4,000 per annum. This limit has now been increased to £10,000.

The changes announced in the budget were designed to encourage older workers back into the workforce and in particular to retain senior staff in the NHS. The immediate announcement by Labour that they would reverse these changes means that there is a window of opportunity before the next election to benefit from this favourable treatment.

For the key people which the government were targeting with these changes such as experienced doctors, it may have the opposite effect and crystallise their decision to retire now based on these latest favourable rules.

Any advice provided now will be based on current legislation. There is no certainty that these rules will change in future or how any future change will affect the taxation of pensions.

If you would like more information about our financial planning services,
please get in touch with our team of specialist advisers.

Posted in News, Newswire.