HMRC has recently increased the pension annual allowance from £40,000 to £60,000. This change could have a significant impact on the retirement planning of many people, especially high earners (anyone earning over £40,000).
The annual allowance is the amount of money that can be contributed to a pension each tax year while still receiving tax relief if certain conditions are met; it could be more using carry forward. The allowance was previously set at £40,000 but it has now been increased to £60,000 for the 2023/24 tax year.
This £20,000 increase is significant because it allows you to save more for retirement in a very tax efficient wrapper of a pension and gives you more flexibility to bring work to an end.
This is specifically important if you are in the final years of employment or if you consider there will be potential future changes to the pension environment, including a change of government.
A change in government (next general election slated for January 2025) could see changes to both the new annual allowance and the lifetime allowance, so these changes could be considered as a closing window of opportunity.
The increase may not only benefit high earners, it could also benefit those who have taken a career break or have had irregular income. For example, women who have taken time off work to care for children or elderly relatives may have found it difficult to build up a sufficient pension pot due to lower earnings or periods of unemployment. The new, higher annual allowance will allow them to make larger contributions when they return to work and catch up on any missed savings.
According to a report by the Pensions and lifetime savings association approximately 13.6 million people in the UK are not saving enough for their retirement. The new, higher allowance may encourage some to start saving or increase their contributions, which will ultimately lead to a more financially secure retirement.
It is worth noting, however, not everyone will be able to take advantage of the new, higher annual allowance. The allowance may be “tapered” for individuals who earn over £200,000 per year. Additionally, individuals who have already started taking defined contribution pension income will be subject to a lower annual allowance, known as the money purchase annual allowance (£10,000 per annum for the 2023/24 tax year).
It is important to remember that pension savings should not be the sole focus of retirement planning but the sooner you start planning for the future, the more likely it is you will have a secure and stable retirement. This is what we help clients to do at Wingate using detailed cash flow planning centred on your individual picture of retirement and then maximise opportunities every year.
If the last few years have taught us anything it’s that the political environment can change very quickly so it would be worth “making hay whilst the sun shines”.