20th October 2023 - Ben Nolan

Here’s why pension reforms mean you might want to reconsider your retirement plan 

Government changes to the taxation of pensions may mean you could save far more tax-efficiently for retirement. If a potential tax bill influenced your current retirement date, it might be worth reviewing your plan.

Previously, the Lifetime Allowance (LTA) affected the total pension benefits you could build up before facing a possible tax charge.

In 2022/23, the LTA was £1,073,100. If you exceeded the LTA, you may have faced a tax charge on the portion above the threshold when you accessed your pension. The charge varied depending on how you accessed your savings, but it could be as high as 55%.

For some workers, the LTA may have led to them opting out of their pension or influenced their retirement date to avoid a future tax bill.

The chancellor cut the Lifetime Allowance charge to 0% in 2023/24

While the LTA is currently still in place, chancellor Jeremey Hunt announced the charge for exceeding the threshold would be 0% from April 2023. The move effectively made the allowance redundant.

The government is expected to fully abolish the LTA in 2024.

For workers who were concerned about exceeding the LTA, it could mean they’d benefit from a review of their retirement plan.

In fact, research suggests many high earners now plan to work for longer as a result.

Tax change spurs two-thirds of high-net-worth individuals to consider working longer

A report in IFA Magazine suggests a significant proportion of high-net-worth individuals are re-evaluating their retirement plans due to the LTA changes.

A survey found:

The chancellor reportedly made the change to encourage highly skilled workers, particularly NHS employees, to remain in or return to work. The survey results indicate removing the LTA charge may have been successful in achieving this aim.

Consider your lifestyle goals when reviewing your retirement plan 

While the LTA reforms could mean you’re able to save more into your pension tax-efficiently, it’s not the only factor to consider when reviewing your retirement plans.

Finances are a key part of planning for retirement, but so are your wishes and life goals.

Working longer might provide an opportunity to build up your wealth. Yet, if retirement is something you’re looking forward to and are ready to embrace, should you put it off simply to boost your savings further?

Setting out when you’d ideally like to retire and the lifestyle you hope to enjoy could help you calculate how much wealth you need to achieve it. In some cases, you might find contributing to a pension for longer is right for you, but, for others, retiring sooner may better align with their goals.

So, as part of your retirement review, you should also consider non-financial aims.

The Annual Allowance limits how much you can tax-efficiently add to your pension each tax year

If you do decide to work longer or return to employment to increase your pension savings, you should keep the Annual Allowance in mind.

The Annual Allowance limits how much you can tax-efficiently add to your pension during each tax year. In 2023/24, the Annual Allowance is £60,000 (up to 100% of your annual earnings).

If you exceed the Annual Allowance, you won’t receive tax relief on the portion above the threshold and you could face an unexpected bill.

Some workers may have a lower Annual Allowance. For example, if you’ve already taken an income from your pension, you may be affected by the Money Purchase Annual Allowance (MPAA). The MPAA reduces how much you can tax-efficiently contribute to your pension to just £10,000 in 2023/24.

Workers with a taxable income over £260,000 in 2023/24 will also have a lower Annual Allowance – for every £2 your income exceeds the threshold, your Annual Allowance falls by £1.

If you have any questions about your Annual Allowance, please speak to your financial planner.

We’re here to discuss your retirement plans

Speak to us if you want to review your retirement plans in light of the changes or would like to understand the lifestyle you can afford in retirement. As always, we’ll work with you to assess your retirement savings and help you achieve the lifestyle you desire.

Risk warnings

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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