On 15 March 2023, the chancellor, Jeremy Hunt, presented his spring Budget.
One of the most notable policy announcements he made was that no one will be subject to the pensions Lifetime Allowance (LTA) in the 2023/24 tax year.
Furthermore, he also confirmed that legislation will be brought forward shortly to abolish the LTA entirely.
Discover why this is so important, not only in terms of being an immediate opportunity to boost your pension savings, but also if you’re thinking about transferring your UK pension to an Australian super arrangement.
The Lifetime Allowance has previously limited your tax-efficient pension savings
The LTA is the maximum amount of tax-efficient pension savings you can accrue in your lifetime including all contributions, pension tax relief, and investment returns.
In the 2022/23 tax year it stood at £1,073,100.
In recent months, the chancellor came under a lot of pressure to increase the LTA, especially from NHS doctors and other senior professionals who were finding that it was inhibiting their pension saving potential.
Rather than simply increase it, he confirmed the LTA tax charges will not be applied in the 2023/24 tax year and also announced that future legislation would abolish it entirely.
This means that from April 2023, there will be no limit on the amount of tax-efficient pension savings you can accrue.
There may however be occasions where tax could still be charged at the recipient’s marginal rate, such as serious ill-health lump sums or defined benefits lump sum death benefit.
It’s also important to note, however, that the maximum pension tax-free lump sum has now been capped at £268,275. This means that, even though you can build a substantial fund without incurring an LTA tax charge, the tax-free lump sum will not grow with it.
Labour have already pledged to reverse the LTA change
You should be aware that the change to the LTA may not be a long-term proposition.
The Labour Party have already confirmed that they will reverse this change if they win the next election. Latest opinion polls currently suggest that this is the most likely outcome, with figures pointing to them enjoying a comfortable Commons majority.
The next election has to be held by January 2025 at the latest, and most informed commentators are expecting it to be held in either the spring or autumn of 2024.
This clearly means that you may only have a brief period in which to take advantage of the changes to the LTA recently announced.
It’s an excellent opportunity to boost your pension fund
As well as removing the LTA, the chancellor also gave UK pension savers a further boost by increasing the Annual Allowance from £40,000 to £60,000 from 6 April 2023.
The Annual Allowance is the amount that you can save into your pension each tax year while still being able to benefit from tax relief at your marginal rate of Income Tax.
Don’t forget you can also “carry forward” unused Annual Allowance from the three previous tax years.
This means that you could make a potential tax relievable contribution of £180,000 to your personal pension after 6 April 2023 (using the Annual Allowance of £40,000 for 2020/21, 2021/22 and 2022/23 and £60,000 for 2023/24).
Transferring your UK pension to Australia
With offices in both the UK and Australia, we have advised many clients regarding transferring their UK pension to an Australian scheme.
Doing so can create a highly advantageous tax position for yourself. You will have benefited from tax relief on your contributions at your marginal rate while accruing your fund in the UK. You will then be able to draw income from the fund free from tax through an Australian super.
Up until now, if you were transferring a substantial fund, the benefit was tempered by having to pay the 25% tax charge on any excess over the LTA at the time of transfer.
So, clearly, the removal of the LTA now makes this even more beneficial.
As you have read, the change to the Annual Allowance, and the availability of the carry forward facility, mean you have an opportunity to boost your pension fund in the short term prior to transferring it.
Given the very real potential for this opportunity to be withdrawn after the next election, we would suggest that you should give this issue priority if you’re planning to move to Australia in the near future. Likewise, if you’re already living in Australia and considering your retirement options.
Your ability to transfer your UK pension to a super is subject to strict eligibility rules.
For example:
- Not all UK pension schemes can be transferred
- Likewise, pensions currently in payment cannot be transferred
- You need to be aged 55 or over to transfer your pension to a super, rising to age 57 in 2028.
If you’re thinking of transferring, we have produced a detailed guide on the subject that you should find helpful and informative.
Get in touch
The recently announced changes to the LTA clearly mean you should look to review your pension arrangements, regardless of whether you’re planning to move to Australia or stay put in the UK.
If you’d like to discuss your options, please get in touch with us.
Please note
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of ATO and HMRC legislation, which is subject to change.
