Pension Update 2024: Limits, Allowances, and What's Gone
On March 15, 2023, the government announced new budget details, including big changes to pension taxes. Starting from April 6, 2023, there won't be a limit on the total pension savings you can have without paying extra taxes. This was a big change from before.
- Abolition of lifetime allowance from April 2023, removing the cap on tax-free pension savings.
- New limits from April 2024:
- Tax-free lump sum allowance capped at £268,275.
- Death benefit lump sum allowance set at £1,073,100.
- Overseas transfer limit also at £1,073,100, with a 25% tax on excess.
Before the new rules kick in on April 6, 2024, there's a maximum limit on pension savings known as the lifetime allowance. If your total pension savings exceed this limit, any amount over it is subject to a tax charge. Additionally, there are specific allowances for tax-free lump sums and rules around transferring pensions overseas, with taxes applied to amounts exceeding these allowances.
Starting April 6, 2024, there will be three new rules for pensions:
- Lump Sum Allowance Limit of £268,275 - This is the maximum amount you can get as a tax-free lump sum from all your pensions combined, including the LGPS pension. If you have a special certificate, you might be allowed more than this limit. If you take out more than this limit, you'll have to pay taxes on the extra amount at your usual tax rate.
- Lump Sum Death Benefit Allowance of £1,073,100 - This is the maximum amount that can be given tax-free from your pension to someone else if you die before you're 75 years old. Any amount over this will be taxed at the beneficiary's tax rate.
- Overseas Transfer Allowance of £1,073,100 - This is the most you can move from your pension to an overseas pension scheme without getting hit with a 25% tax. If you transfer more than this, you'll have to pay the extra tax.
After April 6, 2024, if you retire and have taken pension benefits before, we'll check your pension savings as we usually do. But, we'll also need to know about any lump sums you've already gotten to make sure everything lines up with the new rules.
Our Opinion:
The recent changes to pension tax rules are a significant turning point for retirement planning in the UK. The abolition of the lifetime allowance from April 6, 2023, is particularly noteworthy. This move could be seen as a double-edged sword. On one hand, it liberates savers from the fear of surpassing a tax threshold that penalizes diligent saving and investment growth. On the other, it raises questions about the long-term sustainability of such a policy in terms of public finances.
The introduction of the new limits from April 6, 2024, including the lump sum allowance limit and the lump sum death benefit allowance, attempts to balance this freedom with some level of tax control.
It's a smart way to encourage saving for retirement while ensuring that the system remains fair and sustainable.
However, the key to making the most of these changes lies in understanding them. For many, the new rules might seem complex, but they offer a chance to rethink retirement savings strategies. It's crucial for individuals to seek advice tailored to their personal circumstances, especially considering the potential for higher tax-free lump sums with a valid protection certificate.
In our view, these reforms could lead to a more flexible and potentially more rewarding retirement savings environment. Yet, they also underscore the importance of planning and advice in navigating the evolving landscape of pension taxation.
The challenge for savers will be to adapt to these changes in a way that maximizes their retirement benefits while staying within the new rules.
