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Budget basics - decoding the jargon


Whether your 40 or 4 years away from retirement, it’s important to understand what impact the changes to pension allowances could mean for you.

Here, we’ve simplified what these are, and how they could affect your retirement savings.

Annual allowance

The annual allowance is the total amount that can be saved into your pension plans each year before you have to pay an additional tax charge. This has increased from £40,000 to £60,000.
This means you can invest more money into your pension before you pay additional tax.

Money purchase annual allowance

If you access any taxable money from your pension plan then you may see your allowance reduce. This is known as the money purchase annual allowance.
This allowance has now increased from £4,000 to £10,000.
This means once you’ve accessed your pension, you can pay more money into it afterwards before you pay additional tax.

Tapered annual allowance

The tapered annual allowance gradually reduces the amount you can save into your pension plan each tax year (depending on your income).  The amount of adjusted income that starts to reduce the allowance has increased from £240,000 to £260,000. 
The minimum amount that the allowance can reduce to has increased from £4,000 to £10,000.
This means you can invest more money into your pension before you pay additional tax.

Lifetime allowance

The lifetime allowance (currently £1,073,100) is the total amount of pension savings you can build up in all HMRC registered pension schemes in your lifetime without facing an additional tax charge when you come to take them.
The additional charge on anything over the allowance has been removed and instead tax will be now charged at your marginal rate of income tax.
This means you will pay less tax on any benefits that exceed the lifetime allowance.

There was also a change to the fixed and enhanced protection.

Fixed and Enhanced Protection

These protections entitle you to a lifetime allowance that is higher than the standard amount.  You will have received a certificate from HMRC if this is the case.  To keep the protection, it would not have been possible to make any further contributions into any registered pension scheme and transferring your benefits to certain other pension schemes was also restricted.  However, as long as you applied for the protection before 15 March 2023, contributions can be re-started and transfers can be paid from 6 April 2023 without losing the protection.

If you have an enhanced protection certificate that also confirms a percentage of tax-free cash, that percentage will be based on the value of your pension pot as at 5 April 2023.

This means you can restart saving into a pension without losing the higher lifetime allowance.

Please visit Tax Year Rates and Allowances 2023/2024 for the latest list of tax rates and allowances. To help you understand any tax implications, you should speak to a financial adviser. You can find one in your local area at Advisers usually charge for their services.