The Budget announced a number of changes in relation to pension schemes.
Since 2015 the maximum amount which can be added to a pension each year, the annual allowance, has been capped at £40,000. The 2023 Spring Budget announced that this limit would be increased to £60,000 per year from 6 April 2023 onwards.
The annual allowance includes both employer and personal pension contributions in the tax year.
This applies to all individuals except high income individuals. A high-income individual is defined as having adjusted income over £260,000 (an increase of £20,000 on 2022/23) and threshold income of £200,000.
Adjusted income comprises of net income plus employer’s pension contributions. Threshold income includes net income less personal pension contributions.
A high-income individual will continue to have their annual allowance tapered by £1 for every £2 their adjusted income exceeds £260,000. Therefore, once an individual’s adjusted income exceeds £360,000 their annual allowance will be fully restricted to the minimum amount.
The minimum amount has also returned to 2019/20 levels of £10,000, increasing from £4,000. This measure means that regardless of an individual’s level of income they can contribute £10,000 into their pension per year. This applies to both defined benefit and defined contribution pension schemes.
The prior three years annual allowance are still able to be utilised in the current year, subject to relevant conditions being met. The prior three years annual allowance remains at £40,000 per year.
The final, and most significant, change to the current pension system was an abolishment of the lifetime allowance. Previously set at £1,073,100 for 2022/23 the lifetime allowance has now been abolished so that there is no limit on the maximum value of a pension pot.
However, the 25% tax free lump sum draw down remains at £1.073 million. Therefore, an individual’s maximum tax-free draw down is limited to £268,275 (£1.073 million x 25%). An individual who is already protected by a greater lifetime allowance from prior to 2015/16 will continue to be protected.
The Government hopes this measure will encourage individuals to work beyond turning 50 years old with the added benefit of being able to continue to grow their pensions.