The Chancellor has announced on 15 March 2023 significant changes to two limits which mean you can save more towards your retirement before facing any extra tax charges.

Key takeaways:

1. No more Lifetime Allowance (LTA)

   The big news is that there’s no longer a cap on how much you can save tax-efficiently for retirement. The Lifetime Allowance (LTA), which was how much you could save in total into your pension before paying a tax charge, will be removed. From 6 April 2023, no one needs to report or pay LTA tax charges, although the LTA will only be officially abolished from April 2024.

   The most you can normally take as a tax-free cash lump sum when you retire, which was linked to the LTA, will now be capped for most people at £268,275 (which is 25% of the LTA for the 2022/23 tax year). Other benefits that are taxed at 55% if they go over the LTA (like some death benefits) will now be taxed at the individual’s marginal rate.

   Visit gov.uk/tax-on-your-private-pension to find out more about how these limits work, including how to work out your own numbers.

   What happens if I had LTA protection?

   If you had previously protected your LTA from future reductions in the LTA (by fixing it at a higher historic value using Fixed Protection or Individual Protection), you may still be able to take a tax-free cash lump sum when you retire based on 25% of your fixed LTA rate. This would be a higher amount than the new cap.

   With certain LTA protections, you were unable to add to your pension without losing your protected LTA. From 6 April 2023, you will be able to start building up your pension benefits again, without being at risk of losing your protection, and will keep your entitlement to a higher tax-free cash lump sum.

2. A rise in the Annual Allowance (AA)

   The AA, which limits how much you can save into a pension each year without paying tax on the contributions, is still around, but is rising for the first time in a number of years. The AA varies depending on how much you earn and if you’ve already started taking your retirement savings:

   • For most people, your AA jumps from £40,000 to £60,000 a year from April 2023.
   • For higher earners, your AA may be reduced, or tapered, from this standard limit as your income rises. The lowest that this tapered AA could fall to will now be £10,000 (up from £4,000 in the last tax year). The tapered AA won’t start to kick in until you’ve reached a higher adjusted income of £260,000 (compared to £240,000 last tax year).
   • If you’ve started to take any of your retirement savings, the Money Purchase Annual Allowance might apply to any future retirement savings instead. This limit is rising from £4,000 to £10,000.

These amounts are for the 2023/24 tax year. The amounts for future tax years may change and will be confirmed by the Government. Log in to your pension account to find the latest information on pension tax allowances and the UKRF (go to How it works then select 'Pension tax allowances').

Time to review your choices?

These changes affect how you’re able to save for the future, so it’s worth taking time to revisit your retirement plans. For example, you might want to consider when you want to retire, now that there’s no longer a tax limit on how much your retirement savings could grow. If you have defined contribution (DC) savings (including the Afterwork Investment Account), you might also want to consider how much you contribute.

It is important to note that the legislation to support these changes has not been finalised and could change again in the future.

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