With changes to Dividend and Capital Gains Tax just around the corner, the headlines around the Pension Lifetime allowance and the Annual Allowance were certainly welcome news for savers. The key takeaways for investors are as follows:
Pension Lifetime Allowance Abolished
In perhaps the biggest change to the pensions system since the reforms of 2015, Chancellor Jeremy Hunt announced plans to abolish the Lifetime Allowance (LTA) from 6th April 2023. The LTA, which currently stands at £1.07m is the maximum amount of tax-free pension savings an individual can accrue over their lifetime. Once the value of the pension exceeds the LTA, any excess above the LTA is subject to a tax charge of up to 55%. By removing the LTA, the Chancellor has made it possible to pay additional funds into a pension which is the most tax efficient way to save without being penalised.
Annual Allowance Increases
The other key headline around pensions was that the Annual Allowance (the amount you can place in your pension free of tax in a single tax year) will rise from £40,000 to £60,000 from April 6th 2023, having been frozen for nine years previously. This again represents a welcome opportunity for savers to place more money into their pension.
Although not announced at the dispatch box, the Pension Commencement Lump Sum (the maximum amount you can withdraw from your pension free of tax) will remain frozen at £268,275 (25% of the current LTA).
For adults, the maximum amount you can deposit into an Individual Savings Account (ISA) remains at £20,000. The Lifetime ISA limit, which contributes to your overall ISA allowance will also remain at its current level of £4,000.
Importance Of Holistic Planning
While the headlines certainly sound positive for pensions, Shadow Chancellor Rachel Reeves has said if Labour were to win the next General Election, they would overturn the abolishment of the LTA. And with the allowance changing numerous times over the last decade, this news only further serves to highlight the importance of taking a holistic approach to financial planning and ensuring you are able to take advantage of all relevant HMRC endorsed schemes available to you to mitigate your tax liability.
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