Government changes to when pensions are taxed may mean you could save far more tax-efficiently for your retirement. If a potential tax bill influenced your current retirement date, it might be worth reviewing your plan.

Previously, the Lifetime Allowance (LTA) affected the total pension benefits you could build up before facing a possible tax charge.

In 2022/23, the LTA was £1,073,100. If you exceeded the LTA, you may have faced a tax charge on the portion above the threshold when you accessed your pension. The charge varied depending on how you accessed your savings, but it could be as high as 55%.

For some workers, the LTA may have led to them opting out of their pension or affected their retirement date to avoid a future tax bill.

The chancellor cut the Lifetime Allowance charge to 0% in 2023/24

While the LTA is currently still in place, chancellor Jeremey Hunt announced the charge for exceeding the threshold would be 0% from April 2023. The move effectively made the allowance redundant.

The government is expected to abolish the LTA in 2024.

For workers who were concerned about exceeding the LTA, it could mean they’d benefit from a review of their retirement plan.

In fact, research suggests many high earners now plan to work for longer as a result.

Tax change spurs two-thirds of high net worth individuals to consider working for longer

A report in IFA Magazine suggests a significant proportion of high net worth individuals (HNWI) are re-evaluating their retirement plans due to the LTA changes.

A survey found:

• Two-thirds of HNWIs are considering working for longer
• 76% of HNWIs in the health sector may work for longer than previously planned
• 1 in 5 retired HNWIs plan to return to work
• 35% of retired HNWIs are considering returning to work.

The chancellor reportedly made the change to encourage highly skilled workers, particularly NHS employees, to remain in or return to work. The survey results indicate removing the LTA charge may have been successful in achieving this aim.

Consider your lifestyle goals when reviewing your retirement plan

While the LTA reforms could mean you’re able to save more into your pension tax-efficiently, it’s not the only factor to consider when reviewing your retirement plans.

Finances are a key part of planning for retirement, but so are your wishes and life goals.

Working for longer might provide an opportunity to build up your wealth. Yet, if retirement is something you’re looking forward to and are ready to embrace, should you put it off to boost your savings further?

Setting out when you’d ideally like to retire and the lifestyle you hope to enjoy could help you calculate how much wealth you need to accrue in your pension for it to be achievable. In some cases, you might find contributing to a pension for longer is right for you, but, for others, retiring sooner may better align with their goals.

So, as part of your retirement review, you should also consider non-financial aims.

The Annual Allowance limits how much you can tax-efficiently add to your pension each tax year

If you do decide to work for longer or return to employment to increase your pension savings, you should keep the Annual Allowance in mind.

The Annual Allowance limits how much you can tax-efficiently add to your pension during each tax year. In 2023/24, the Annual Allowance is up to £60,000 (up to 100% of your annual earnings).

If you exceed the Annual Allowance, you won’t receive tax relief on the portion above the threshold and you could face an unexpected bill.

Some workers may have a lower Annual Allowance. For example, if you’ve already taken an income from your pension, you may be affected by the Money Purchase Annual Allowance (MPAA). The MPAA reduces how much you can tax-efficiently contribute to your pension to just £10,000 in 2023/24.

Workers with a taxable income over £260,000 in 2023/24 will also have a lower Annual Allowance – for every £2 your income exceeds the threshold, your Annual Allowance falls by £1.

If you have any questions about your Annual Allowance, please contact us.

Contact us to talk about your retirement plans

Whether you want to review your retirement plans in light of the LTA changes or want to understand the lifestyle your pension will afford, we could help.

We’ll work with you to assess your retirement savings and how they could deliver an income in retirement. Creating a financial plan could mean you feel more confident about the future. Please contact us to arrange a meeting.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.