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Will Budget pension lifetime and annual allowance changes help you?


Chancellor Jeremy Hunt went further than expected with major pension saving changes in his Budget today. 

The biggest step came as Hunt abolished the restrictive pensions lifetime allowance completely, rather than raising it from just under £1.1million to £1.8million, as expected.

He also raised the annual allowance on contributions that can be made from £40,000 to £60,000. 

The Chancellor also increased the amount workers who have already drawn on their pension can pay into their pension pots every year without tax penalties, from £4,000 to £10,000. This is known as the Money Purchase Annual Allowance.

The moves are most likely to help high-earners who have already built up sizeable pension pots – and are targeted at keeping over-50s professionals such as doctors in work.

But what difference will the lifetime and annual allowance shake-up make and will they ever help you? We explain the pensions changes the Chancellor has made and what it all means for you.

Retirement shake-up: Chancellor Jeremy Hunt has made three huge changes to how Britons can access their pension, and how much they can save and still get tax perks

Retirement shake-up: Chancellor Jeremy Hunt has made three huge changes to how Britons can access their pension, and how much they can save and still get tax perks

What are the Budget pension changes in a nutshell?

Chancellor Jeremy Hunt gave a boost to high-earning workers by scrapping limits on how much can be saved in a pension, known as the pensions lifetime allowance. 

He has also increased how much workers can save into a pension every year and still get tax relief, which is called the annual allowance.

Hunt also raised the amount people can put into their pension every year without being taxed once they have started taking cash out of it at 55 – the Money Purchase Annual Allowance.

What is the pensions lifetime allowance?

This limits the amount people can have in their pension pot without facing tax penalties, but the figure includes both the money they and their employer have paid in and any growth over the years.

It is not a limit on how much can be paid into a pension, as savers can continue paying in above it, but hefty tax charges will then hit them when they retire.

This is Money’s pension expert Steve Webb’s verdict 

‘For more than a decade we have seen a series of big cuts to annual and lifetime limits to pension tax relief, resulting in large numbers of people being unable to save more into a pension without incurring an extra tax bill. 

‘Today’s Budget represents a sea-change in government policy and will set millions of people free to save more into pensions. We are likely to see a ‘flood’ of new money into pensions from higher earners. 

‘There will be an urgent need for such people to take financial advice to make sure that they are best placed to take advantage of the much more positive regime which has just been introduced – perhaps even before the start of the coming tax year and the new regime.’ 

Steve Webb is a partner at LCP and a This is Money columnist, and was formerly pensions minister 

Any money above this level taken as income incurs an extra 25 per cent charge and as a lump sum it incurs a 55 per cent charge – this comes on top of normal income tax.

The lifetime allowance was expected to be raised to as high as £1.8million in the Budget but has now been scrapped altogether.

Why is the lifetime allowance so controversial? 

When the lifetime allowance was introduced by Labour in 2006 it was £1.5million, this was gradually raised to reach £1.8million in the 2010/2011 tax year.

However, it was then slashed by Conservative Chancellors George Osborne and Philip Hammond, falling all the way down to £1million in 2017/2018.

If the lifetime allowance had risen in line with inflation since 2006 it would now stand at £2.66million, according to This is Money’s inflation calculator.

For someone with a defined contribution pension kept invested and drawn on at a standard rate of 4 per cent annually, the lifetime allowance of £1,073,100 equates to an income of £43,000.

Why scrap the pensions lifetime allowance? 

The increasing squeeze of a lifetime allowance that has failed to keep pace with inflation, wages and growing pension pots has triggered unintended consequences.

Higher paid professionals, most notably much-needed experienced doctors, are opting for early retirement rather than face tax penalties for overshooting it.

The Government wants to keep people in the workforce, and has thrown them a pensions sweetener as encouragement. 

 It looks like the Chancellor has reached for the biggest carrot he could find

PensionBee’s Becky O’Connor on the Chancellor scrapping the lifetime allowance 

The changes mean there is no limit to how a pension pot can grow without tax penalties being applied.

Becky O’Connor, director of public affairs at pension firm PensionBee, said: ‘It looks like the Chancellor has reached for the biggest carrot he could find when it comes to keeping experienced workers in the workplace, by scrapping the lifetime allowance.

‘The abolition of the lifetime allowance is a huge and unexpected move. For many, this will turn pensions from a complex planning nightmare into something that they can have confidence in. Removing it completely makes pensions simpler at a stroke.’

But while the Chancellor has abolished the lifetime allowance, he has not changed the rules on how much can be taken out of pension pots as a lump sum free of tax.

The rules are that 25 per cent of your pension pot higher than the £1,073,100 lifetime allowance can be accessed with no tax charges – £268,275, in other words. 

Today’s announcement by the Chancellor freezes this limit indefinitely at that level.

What do changes to the annual allowance mean?

The annual allowance  is the standard amount that can be contributed to pensions every year and qualify for tax relief.

It’s not just the money you pay in though. It includes your contributions, your employer’s contributions, and tax relief.

Basic rate tax relief of 25 per cent is automatically added to pension contributions, so without an employer paying into a pension someone could put in £32,000 before they hit the current £40,000 cap. 

The Chancellor has unveiled plans to raise the annual allowance to £60,000.

There is also good news for high earners, whose annual allowance was previously tapered down to as little as £4,000.

The Chancellor today changed the tapering rules so even the highest earners can save £10,000 with no tax hit.

The threshold income level, where people’s annual earnings start being calculated for the purposes of pension tax relief, is £200,000.

But the annual allowance starts being tapered down for people with an adjusted income level – which includes pension contributions – of £240,000.

What do the MPAA changes mean for me?

Workers who are past the age of 55 can take money out of their private pension but still save into it.

But if they take out more than £4,000 a year, they are hit with tax penalties under MPAA rules.

The Chancellor today said that £4,000 limit would rise to £10,000 from April this year.  

Jon Greer, head of retirement policy at investment firm Quilter, said: ‘While it might have gone somewhat under the radar, arguably the only change to the pension landscape today that will certainly help the masses when it comes to pension saving and creating an incentive to return to work is the increase in the MPAA.’

O’Connor said: ‘Increasing the Money Purchase Annual Allowance is great for ‘yo-yo’ retirees, who have to dip into their pension pot for a time, but then want to boost it again before they properly retire.’ 

The Chancellor’s MPAA changes actually just return it to an earlier level.  

The MPAA was first introduced in 2015 at £10,000, before it was lowered to £4,000 in 2017.

Will the state pension age change?

Before the Budget, rumours were circling that the Chancellor might announce plans to raise the state pension age to 68 by 2035.

However, this has not happened – yet. 

He also did not increase the age Britons could access their private pensions to 60, as was hinted at in several reports. This is currently 55, and is due to rise to 57. 

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