If you haven’t been using all your pension annual allowance for the past few years – and if you can afford to – now might be a very good time to boost that pension pot.
You have a workplace pension. All your workforce does. Most won’t be bumping up against the tax-free thresholds because, at time of writing the day after the Chancellor’s Budget, those are hefty thresholds. You’d need to put more than £40,000 a year into your pension to find yourself paying 25% tax on anything above £40,000 (although that figure does include all contributions, including from employers and tax relief).
But for some business owners and C-suite leaders, for whom £40,000 into the pension may be a possibility, the Chancellor presented a big, gift-wrapped present yesterday.
The tax-free allowance will leap from £40,000 to £60,000 from 6 April 2023. The lifetime allowance (that is, the total amount that can be in your pension pot while still enjoying the full range of tax advantages) which was previously £1,073,100 is going to be scrapped. And just in case you haven’t used your full pension annual allowance recently, you can carryover three years’ worth of any unused allowance too.
Why is the Government removing pension limits?
Governments tend not to trumpet measures designed to benefit the relatively wealthy. So why is this government so keen to talk up this move? The answer lies in the subject of one of this month’s other posts: the over-55s.
The UK has a well-documented productivity problem. One of the reasons for that is that so many over-55s left the workforce post-pandemic and, although many are not confident they can afford to retire, some can. For those that can, their departure from workforce may be exacerbated by the fact that there’s no point, in their minds, working to pay the taxman. The higher the pension thresholds, the less that is the case.
By increasing or removing pensions limits, Jeremy Hunt is hoping a few thousand people who might have been contemplating early retirement will stick around.
Why now is the time to act on your pension
The move is expected to see money flooding into pension funds. That might always have been the case, but the drive to take advantage of every last £ of carryover is likely to be even greater following Labour’s announcement that they would reverse the measures. With an election due in late 2024 and Labour currently 21% ahead in the polls, that could mean the clock is already ticking on the pensions bonanza.
So if you or people on your payroll are positively affected by the Budget’s pension changes, now really is the time to act.