Wealth Planning -
Budget 2023: Four financial planning takeaways
The March 2023 budget had some important updates for pension savers. Here is a quick round-up of our top four takeaways.
1. Pension Lifetime Allowance (LTA) to be abolished
Currently, there is a limit on how much you can accumulate in a pension over your lifetime before tax may be due. This is known as the lifetime allowance (LTA) and is set at £1,073,100. We expected this limit to increase, however, it was a surprise for it to be abolished entirely. From the 2023/2024 tax year, there will be no LTA tax charge, and from 2024/2025 this change will be written into legislation. Previously, where the LTA was not exceeded, you could draw a tax-free lump sum of 25% of the value of your pension. This tax-free lump sum will remain unchanged at the current level of £268,275, and where individuals have transitional protections (allowing them to benefit from a higher tax-free lump sum), they can retain this benefit.
2. Annual Allowance increasing by £20,000 to £60,000
The maximum amount that you can typically contribute to a pension each tax year will increase from £40,000 to £60,000. This change will come into effect from 6 April 2023. Also, the tapered Annual Allowance is increasing from £4,000 to a minimum of £10,000. For high income individuals, the threshold of when the annual allowance starts to reduce will be increasing from £240,000 to £260,000 from the 2023/2024 tax year. For every £2 of adjusted income over £260,000, the individual will lose £1 of their Annual Allowance, dropping to a minimum of £10,000.
3. Money Purchase Annual Allowance (MPAA) increasing to £10,000
Once an individual starts drawing down from a defined contribution pension, the MPAA is applicable. Previously, you could only contribute £4,000 into a pension each tax year. This is now increasing to £10,000 from the 2023/2024 tax year.
4. Savings and ISA allowances frozen
The ISA allowance will remain at £20,000 and the Junior ISA allowance is also unchanged at £9,000. It is important to ensure that with pension allowances increasing, that you are maximising the benefits available to you. Pensions and allowances are a complex area of financial planning, so it is important you seek specialist advice.
Further reading about Wealth Planning
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The new tax year starts on 6 April 2023 - are you prepared?
The amount you need to save toward your pension depends on how much you want to live on when you retire.
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