15 March 2023

Against a backdrop of industrial action, inflation, low employment levels and a cost-of-living crisis, there has been a raft of changes announced in Jeremy Hunt’s first Budget, and pensions have been impacted significantly.

The new measures affecting pensions will soon take effect from 6 April 2023 and aims to help to keep people working longer and to encourage over 50s (particularly doctors) who had taken early retirement back into work.

There had been speculation of changes to the normal minimum pension age and acceleration of the State Pension age increase in this Budget, but these have been left untouched. There have also been no changes to the 25% tax-free lump sum (although note a new cap has now been set – see below), the carry forward rules and the way that pension savings are accessed.

Here are the key takeaways:

Lifetime allowance changes

The lifetime allowance is the total amount people can save into their pension before paying extra tax and had been frozen at £1,073,100.

In a surprise announcement in the Budget, the lifetime allowance charge will be abolished completely from 6 April 2023, which will reduce the number of taxpayers that need to pay pension tax. The lifetime allowance itself will be removed in future legislation.

Annual allowance changes

There’s further help for pension savers with the £40,000 cap on annual pension contributions – the amount people can save each year before incurring tax – being raised to £60,000.

Money purchase annual allowance (MPAA) changes

The government is keen for people to return to work, and those who face rising costs in retirement could also be keen to come back. However, if they’ve accessed their pension, rules around how much they can contribute to rebuild their pot could deter them.

For those who start to take money from a defined contribution pension pot, the amount that can be contributed to their defined contribution pensions while still getting tax relief is capped at a level much lower than the usual annual allowance (mentioned above). Currently, if a saver triggers the MPAA, the most they can put into a pension pot tax free each tax year drops from £40,000 to £4,000.

The limit of £4,000 will be raised to £10,000 a year with effect from 6 April 2023. This will help people who need to dip into their pension pots before officially retiring, but still need to build up their pension savings before fully giving up work.

Tapered annual allowance changes

Currently, for those on an income of over £240,000 in a tax year, their annual allowance for that tax year will reduce on a tapered basis. For every £2 of adjusted income above £240,000, their annual allowance will reduce by £1. The maximum reduction is £36,000 so anyone with an income of £312,000 or more will have an annual allowance of £4,000.

The minimum tapered annual allowance will rise from £4,000 to £10,000 from 6 April 2023 and the adjusted income threshold will also be increased from £240,000 to £260,000 from 6 April 2023.

Pension commencement lump sum (known as tax-free cash) changes

The maximum amount most savers can currently take as a pension commencement lump sum is 25% of their available lifetime allowance when this sum is taken.

After the removal of the lifetime allowance charge from 6 April 2023, there will be a set cap of £268,275 on the level of available tax-free cash, which will then be frozen. This means that if someone had a pension pot that was far bigger than the previous lifetime allowance, this will be the most they can normally access.