How do the new pension rules impact me?

A new tax year brings a fresh set of allowances, and at his recent Budget, the Chancellor increased what was on offer for pension savers. So, what are the changes, and how will they impact your own finances?

Annual pension allowances

The changes that will affect most people are the limits on what can be paid into a pension each tax year.

The standard annual allowance for pensions is now £60,000. That’s 50% up on last year’s limit of £40,000.

The annual allowance applies to all pension savings made by or for you in a tax year. So not just the money you pay, but the tax relief top-up from the government, and anything paid in by someone else, like your employer.

Keep in mind that the tax relief limits for money you pay in personally will still apply – the maximum you can pay in and get tax relief is still 100% of your UK earnings (including the 20% tax relief).

If your annual allowance was reduced because you’ve had to dip into your pensions before now, or it was tapered down because you’re a high earner, then you’ll see an increase to your new limits too.

I’ve already accessed my pension

Money purchase annual allowance (MPAA) increased to £10,000.

The MPAA will apply if you’ve taken an income from a SIPP or other defined contribution pension. Once it’s been triggered, the amount you can save into these types of pensions is lower than the standard.

The good news is that the MPAA limit is now £10,000 – a big improvement on the previous limit of £4,000. This will help people who’ve previously taken money from their pensions to rebuild their pots for later life without fear of a tax charge.

I’m a high earner

Tapered annual allowance.

The Budget increased both the income threshold (when the taper starts to apply) as well as the allowance itself.

The new minimum tapered annual allowance increases to £10,000, up from £4,000.

For the taper to apply, you’ll usually need to have an income of £260,000 or more.

Download annual allowance tapering guide

Lifetime allowance and tax-free cash changes

Grabbing the most headlines was the announcement to abolish the pension lifetime allowance from 6 April 2024. From now until then, the lifetime allowance will still exist – but there will be no extra tax charges if you go over the current limit of £1,073,100.

Although those with pensions near to or over the old lifetime allowance will benefit most from this change, it does remove a large area of complexity and extra tax from the pensions system.

The amount you can take as tax-free cash from your pensions will still be 25% of your pension value, but with a maximum cap frozen at £268,275 (25% of the old lifetime allowance). The rest of your pensions can be used to provide you with a taxable income, as before.

So, someone with pensions worth £500,000 can still take up to £125,000 tax free, and the rest will be taxed as income as and when they take it.

I already had lifetime allowance protection in place – do the new rules affect me?

Anyone who had valid lifetime allowance protection (as at 15 March 2023) can still use it. Depending on the type of protection you have, it could also mean you have a higher tax-free cash entitlement than the new capped amount of £268,275.

The biggest change for you is that you can now pay into to a SIPP or other pension and not lose that protection. Before 6 April 2023, people with certain types of protection would have lost this if they paid into an existing pension or joined a new scheme.

Can I still carry forward pension allowances?

Carry forward will still be available. Your pension savings will use the current year’s annual allowance (now £60,000) first. The maximum amount will still depend on what you paid in for the previous three tax years, and your annual allowance at the time. Carry forward is not available if you are subject to the money purchase annual allowance.

Download carry forward guide

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