Saturday, 1 April 2023

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Tax-free pension changes: what they mean for you

Tax-free pension changes: what they mean for you

Chancellor Jeremy Hunt’s sweeping boost to UK pension tax breaks looks set to benefit many higher earners, including doctors, lawyers and bankers.

But this week’s announcements raise as many questions as they give answers. Pensioners and pension savers alike are trying to work out what it means for them. Tax planners have been flooded with queries.

Meanwhile, Labour, the favourite to win the next general election, has already pledged to scrap Hunt’s changes, raising doubts about how long the chancellor’s scheme will survive.

In outline, Hunt has abolished the £1.073mn lifetime allowance (LTA) which capped the amount workers could benefit from in tax advantages on their pension pot. From April 6, the tax-advantaged pots will be unlimited.

He also raised from £40,000 to £60,000 the annual allowance limiting how much savers could add to their pot in any year. And he lifted from £4,000 to £10,000 the so-called money purchase annual allowance, limiting the contributions of people who previously accessed their pension pot and later resumed saving into it.

Hunt’s stated intention is to dissuade older, better-paid workers from retiring, especially senior staff in the hard-pressed NHS. However, his critics, led by Labour, accuse him of revising the pensions system to benefit the rich, not least in minimising inheritance taxes.

Certainly, people with accumulated pots of £1mn and more will generally profit from the LTA’s abolition. So will those with much more squirrelled away.

But the annual allowance hike will largely profit the middling rich, people earning £100,000 a year, with the means to use up these allowances, and below £260,000, when the concessions start to taper.

FT Money writers look at the key questions.

How can I make the most of these tax changes?

For most pension savers earning lower and middle incomes, the scrapping of the lifetime allowance won’t make any difference. However, for the estimated 2mn on track to big pension pots, there are substantial savings to be made.

If you were planning imminently to withdraw money from your pension, hold off until April 6 and the new tax year, particularly if you are in a final salary — defined benefit — scheme when the lifetime tax charge is applied immediately on pots above £1.073mn. 

If you were holding back pension contributions, either because you didn’t want to hit the lifetime allowance, or because you risked breaching the annual allowance,…

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