In this month’s Money Matters, Chartered Financial Planner, Peter Harding, looks at the latest changes to pensions and the significant impact these could have on your financial plans.

We also meet Paul Merefield, Peter Harding Wealth Management’s Senior Business Support Administrator, who shares with us, amongst other things, his keen interest in quizzes and music.

+++

By Peter Harding, Chartered Financial Planner.

The Chancellor’s March 2023 Budget announced some important changes to pensions and the tax reliefs associated with them. In general, these measures are good news if you’re saving towards retirement, or if you’re already accessing your pension pot or planning to in the near future.

For those currently managing their pensions or contemplating accessing their pension pot, it is crucial to stay informed about these changes. While the reforms signal positive strides in pension policies, it remains imperative for individuals to remain vigilant against potential pitfalls, such as the risk of mis sold pension. As financial dynamics evolve, it becomes even more critical for individuals to exercise due diligence, seek professional advice, and be aware of any new regulations or safeguards in place to prevent the occurrence of mis-selling practices in the pension industry.

Here are the five most significant pension changes in the 2023 Budget:

1) The pension annual allowance – what’s changed? The standard annual allowance for pension contributions – that is, the maximum pension contribution you can make free of Income Tax every year – increased to £60,000, with effect from 6 April 2023. Previously, the limit stood at £40,000.

How could this affect you? If you’re saving towards your retirement, you now have the opportunity – if financially viable – to greatly increase the amount you can pay into your pension pot each year, while still taking advantage of the generous tax allowances associated with pensions. It’s worth remembering that if, for example, you pay the higher rate of Income Tax (40%), for every £1,000 you contribute to your pension pot, you’ll receive tax relief of up to £400* – so the contribution effectively costs you only £600. Or, put another way, to hit your full £60,000 allowance, your effective contribution would need to be only £36,000.

And don’t forget that you can also take advantage of your pension annual allowance retrospectively if you haven’t used it all in previous years. You can go back up to three tax years and make the most of the unused allowances. However, the allowance for previous years will remain at £40,000.

(*Note that only the basic rate of tax relief is available at the time of contributing – for anything over this amount, you will need to claim the additional tax relief via your annual return and reinvest it into your pension.)

2) The pension lifetime allowance – what’s changed? Until 5 April 2023, the pension lifetime allowance (i.e. the amount you could hold in your pension pot without receiving a tax penalty) was capped at £1,073,100. However, since the start of the new tax year on 6 April, the government’s intention is no one should have to pay a lifetime allowance charge. During the tax year from 6 April 2023 to 5 April 2024, the lifetime allowance will fall away. Then, from 6 April 2024, it is planned to be completely abolished, so there could be no limit on how much you accumulate in your pension while still enjoying its tax advantages.

How could this affect you? This measure will affect you if you’re a higher earner who has been able to maximise your pension contributions. The primary aim of the government policy is to encourage you to keep working, rather than retire once you reach the lifetime limit. It means, in practice, that as long as you continue to earn, you can carry on paying into your pension pot without worrying about receiving a tax penalty.

3) Tax-free cash limits – what’s changed? Although the lifetime allowance has been abolished, the amount you can withdraw from your pension as a tax-free lump sum will continue to be limited, no matter how big your pension pot becomes. Until the changes made in the Budget, you could withdraw no more than 25% of your pension pot free of Income Tax – a maximum of £268,275 (i.e. 25% of the lifetime allowance that stood at £1,073,100). And this cap of £268,275 remains, although those with higher historic protections from certain pension schemes may be entitled to more.

How could this affect you? If your pension pot is likely to grow beyond £1,073,100, and you think you might want to withdraw a lump sum larger than the £268,275 limit, you may wish to consider additional tax-efficient ways of making the most of your money in retirement.

One way of doing this could be to take advantage of your annual ISA allowance of £20,000, as any growth on an ISA is free of Income Tax and Capital Gains Tax – and you can access it at any age, unlike a pension.

4) Money purchase annual allowance – what’s changed? The money purchase annual allowance (MPAA) affects the amount you can contribute into a Defined Contribution pension scheme each year if you’ve started to flexibly access an income from your pension pot. This money purchase limit previously stood at £4,000 per year, but it will increase to £10,000 from the start of the tax year on 6 April.

How could this affect you? The triggers for the MPAA can include taking a lump sum from your pension or moving your pension to a flexible-access drawdown and starting to take an income. There are also many others, which can be complex – so if you’ve already started to access your pension pot or are considering it in the near future, it’s worth seeking expert financial advice to help you make the right decision for your circumstances.

5) Tapered annual allowance – what’s changed? For very high earners, the tapered annual allowance limits the amount of tax relief you can claim on your pension contributions by reducing your annual allowance. The minimum previously stood at £4,000 per year but has now been increased to £10,000.

How could this affect you? This only affects people with a ‘threshold income’ in excess of £200,000 and an ‘adjusted income’ in excess of £260,000. Calculating these figures can be complex, so it’s always best to seek professional advice if you’re likely to fall into this category. If you do, the good news is that the increase in the minimum will allow you to contribute even more to your pension.

If you’d like to discuss these changes to pensions and how they might affect you, get in touch with Peter on 01747 855554 or email: [email protected]

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Peter Harding Wealth Management is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.

Peter Harding Wealth Management is a trading name of Peter Harding Practice Ltd.

Getting to know our team.

Name: Paul Merefield.

Role: Senior Business Support Administrator (Shaftesbury Office).

What’s the best bit about your job?

I get to help my colleagues in all facets of the business. No two days are the same.

If you weren’t doing this role, what might you be doing?

Following The National on the band’s world tour – or maybe trying to become a Pro Quizmaster.

What do you enjoy doing outside of work?

Music – love going to gigs & festivals. Also sports, film, food, travel, socialising, quizzing.

Tell us something about yourself that we don’t know.

My karaoke go-to is The Commitments version of ‘Try A Little Tenderness’.

Who was your childhood hero?

Freddie Mercury (also the most popular incorrect guess for why Fred is my nickname).

What’s your favourite film?

Drive (it’s perfect).

What’s your favourite holiday destination?

I’ve never had a bad time in Dublin.

Give 3 words to describe yourself:

Personable, funny & caring.