What dreams do you have for life after work? Whether you’re in employment or running your own business and wherever you are on your life/work journey, eventually, retirement will become a reality. You’ll have your own idea of how you want to spend your time, but one thing you’ll certainly need is the income to support your dream lifestyle.
A key focus of the Spring Budget earlier this year was reducing economic inactivity. The government introduced a range of initiatives, including some big changes to pension allowances. Whilst these changes are aimed primarily at encouraging people who’ve retired early to return to the workplace, they also present opportunities for individuals who are working and want to boost their retirement funds.
We invited pension expert and Inca strategic partner Tom Frizzell of Frizzell Wealth Management to give us an overview of the most significant changes and explain how they might benefit you.
1. Changes to the annual allowance
The amount of money the government allows you to contribute to your pension fund each year before paying additional tax has increased. Previously, the annual allowance was £40,000 or your total earnings (whichever was lower), but from 6th April 2023, it increased to £60,000.
How might you be able to benefit from this change?
This change will be of particular interest to business owner/directors. Company-paid pension contributions are a highly tax-efficient way to help create wealth, and the raising of the annual allowance provides an opportunity to divert even more profit into your pension fund and accelerate your retirement provision.
Taking your profits in this way means you won’t have to pay Dividend Tax, and by reducing your profits, you will also reduce your liability for Corporation Tax. In the same budget, Corporation Tax increased to 25% for companies with taxable profits exceeding £250,000, and for companies with profits under £250,000, 19%-25% depending on the profit level.
It’s worth noting that – subject to profitability, you are allowed to ‘carry back’ up to three tax years of unused annual allowance. So, if you’ve had the profits in your business but not fully used your annual allowance, you can make retrospective contributions to your pension fund.
If you want to extract funds from your business in this way, you should take advice from your accountant. You’ll need to be sure you have the profits in your business and that taking them out won’t adversely affect your cash flow.
2. Changes to the tapered annual allowance
The amount of money you can pay into your pension fund each year and receive tax relief reduces depending on your income level. Prior to April 2023, the lowest your annual allowance could reduce to was £4,000. In the Spring Budget, the Chancellor announced that this minimum figure would increase to £10,000 from the start of the current tax year.
How might you be able to benefit from this change?
This change will benefit you if you’re a high earner with an income of £260,000 or more. Whilst the effect of tapering will still see your annual allowance reduce by £1 for every £2 you earn over £260,000, it will not go any lower than £10,000 – leaving you £6,000 better off than you would have been before the change.
3. Changes to the money purchase annual allowance
You may have accessed the money in your pension plan early for many reasons. Perhaps you’ve already begun drawing down on your funds, or maybe you’ve cashed in some or even all of your savings. Doing this in previous tax years, the money purchase annual allowance would have reduced the amount of money you could pay into your pension plan from £40,000 to £4,000. However, for the current tax year and going forward, this allowance has been increased to £10,000.
How might you be able to benefit from this change?
The government’s goal in introducing this change is to encourage people who may have taken money from their pension to begin paying in again. If you’ve had to dip into your pension pot to help you get through Covid or the cost of living crisis, the opportunity to benefit from increased tax relief is likely to be particularly attractive.
4. Changes to the lifetime allowance
Until the beginning of the current tax year, the lifetime allowance – the total savings an individual could accrue in their lifetime across all their pension funds without being liable for tax when accessing their savings was £1,073,100.
Despite a previous commitment to keep the lifetime allowance in place until 2026, the Chancellor announced in the Spring Budget that it would be removed entirely from April 2023.
How might you be able to benefit from this change?
If your pension fund was close to or in excess of the previous limit, the removal of the lifetime allowance means you can continue paying in without having to worry about being liable for additional tax when you eventually come to access your funds. For anyone in a position to pay in a lump sum, this presents an excellent opportunity to bolster their retirement savings.
The amount of cash you can take out of your pension fund without paying tax remains unchanged at 25% of the previous lifetime allowance limit of £1,073,100.
For years, regular cuts to tax relief limits on annual and lifetime allowances have discouraged many people from saving more into their pension funds. The changes announced in the Spring Budget mark a shift in government policy, enabling millions of workers to pay more into their retirement funds without becoming liable for additional tax charges.
Review Your Retirement Plans Today!
It’s prudent to review your pension plans regularly, but especially so in light of the recent changes to the annual and lifetime allowances. Your financial circumstances are unique, so it’s essential to get professional advice that’s tailored to your position.
If you’d like to know how you can take advantage of the new rules to enhance your retirement provision further – or need advice regarding any other aspect of pensions or investments, Frizzell Wealth Management can help, working in partnership with Inca where necessary.
Contact Frizzell Wealth Management today for an initial chat. Call 01491 821001 or email [email protected].
For more information about Frizzell Wealth Management, visit www.frizzellwm.co.uk
About Tom Frizzell
Director and Principal Adviser at Frizzell Wealth Management, Tom is passionate about helping his clients make the most of their money and realise their financial goals. He understands that every client has different requirements and works closely with them to build holistic financial plans that will provide and protect them and their families throughout their lifetime.
Tom is a strategic partner of Inca, advising Inca clients about pensions and investments.
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