Pensions are getting some new shoes

The limit on how much can be put into pensions before incurring additional personal taxes will be removed.

Under current regulations, pension savers have a limit of ￡1.073 million, this is known as the lifetime allowance (LTA) – but, as if by magic, this is soon to disappear.

On the other hand, the annual allowance, which is the highest amount you can contribute to a pension in a calendar year and still be eligible for tax benefits, will rise from ￡40,000 to ￡60,000.

All this starting in April 2023!

Let’s investigate these areas a bit deeper to give some further understanding…

The lifetime allowance

Technically speaking, you are free to invest as much as you want into your pension, but if your pot surpassed a particular level, you could face a significant tax charge of up to 55%. This greedy thing is the lifetime allowance limit. However, from April 2023, poof, it’s gone!

The annual allowance

The annual allowance is the maximum amount you are permitted to contribute into a personal pension?within a given tax year in order to receive tax relief.

Now, this has not magically vanished like the lifetime allowance, but as of April 2023, will rise by 50%, from ￡40,000 to ￡60,000. (whoop whoop!)

Any amount over the annual allowance will still result in a tax liability equal to the tax relief you first received on it.

An important point! Any annual allowance that wasn't used in the previous three tax years can be carried forward.

Carry Forward

With carry forward, you can utilise any unused annual allowance from the three prior tax years, beginning with the most recent one. You'll need to know your yearly allowance for each of the preceding three tax years as well as the value of your pension funds for each of those years to calculate how much carry forward you have available.

There are a few rules around this and we will discuss these in another topic.

The money purchase annual allowance (MPAA)

The amount you can contribute to a pension while receiving tax relief is lowered if you have already "flexibly" withdrawn funds from a defined contribution (DC) pension - (for instance, through drawdown)

It is important to know, that this does not include taking just tax-free cash, but taxable income only.

The "money purchase annual allowance" (MPAA),?was created to prevent people who had already withdrawn money from their pension recycling that money and receiving double tax relief. Practically, taking the money out and putting it right back in again. So, this limit was set to ￡4,000 per tax year.

Additionally, triggering the MPAA prevents you from carrying forward any unused yearly allowance from the three prior tax years.?Any unused MPAA cannot be carried over either.

However, from April 2023, we are rolling the clock back to 2010, and the MPAA will then be increased to ￡10,000 per tax year.

Hope this helps.

Nathan

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