Pensions are one of the best tools that your clients have at their disposal when saving for later life. They receive tax relief from the government on their contributions, and they may also benefit from employer contributions.

Additionally, any wealth they save in their pension is invested, so it may grow over time. As a result, they may build a healthy pot to fund their lifestyle in retirement.

However, there have been several notable changes to the tax rules surrounding pensions in the last few years. If your clients don’t understand these rules and how they might be affected, they may fail to take full advantage of the benefits of pensions. In some cases, they could accidentally trigger a tax charge.

Fortunately, we are here to support them. Read on to learn how a financial planner could help your clients navigate pension tax changes.

We can help your clients understand the new allowances replacing the Lifetime Allowance from 6 April 2024

The “Lifetime Allowance” (LTA) is a limit on the total amount your clients can contribute to a pension without triggering a tax charge.

In the 2023/24 tax year, it stands at £1,073,100. However, in his 2023 Spring Budget, Jeremy Hunt announced that the tax charge would be frozen from 6 April 2023, and the LTA would be abolished altogether on 6 April 2024.

This could mean your clients can make more tax-efficient contributions to their pension in the future.

Yet, several new allowances will replace the LTA. They are:

• The lump sum allowance – £268,275 in 2024/25
• The lump sum and death benefits allowance – £1,073,100 in 2024/25

There is also an overseas transfer allowance for clients who are moving their pensions abroad.

These new allowances mean that your clients could still trigger a tax charge when they access their pensions, even though the LTA no longer applies.

For instance, they will still be able to take the first 25% of their pension pot as a tax free lump sum. However, if the amount they take is more than £268,275 – the lump sum allowance – then they may pay Income Tax at their marginal rate on everything that exceeds the threshold.

Additionally, if a client inherits a pension, they may pay tax when accessing any funds that exceed the lump sum and death benefits allowance.

The removal of the LTA could mean that your clients are able to build more wealth in their pensions, while also avoiding an accidental tax charge when they eventually access their savings. We can help explain how these new rules may affect them.

We can help your clients review their pension contributions to take advantage of the increased Annual Allowance

The “Annual Allowance” – the amount you can contribute to your pension each year without triggering a tax charge – is £60,000 (or 100% of your earnings) in 2023/24.

This allowance increased from £40,000 on 6 April 2023.

Additionally, the bottom limit of the Tapered Annual Allowance, which affects high earners and reduces their Annual Allowance, increased from £4,000 to £10,000.

This means your clients may be able to make more tax-efficient contributions to their pension than they could in the past.

However, it’s important that they consider their pension contributions if they want to take advantage of this. If they haven’t made adjustments in response to these pension tax changes, they could be missing out on an opportunity to build their retirement savings further.

We can work with them to assess their current contributions and their wider finances to see if they can afford to increase the amount they pay into their pensions and maximise the tax benefits.

Your clients may want to explore “semi-retirement” after changes to the Money Purchase Annual Allowance

Your client may trigger the “Money Purchase Annual Allowance” (MPAA) if they flexibly access their defined contribution (DC) pension. This effectively lowers their Annual Allowance.

Fortunately, the MPAA increased from £4,000 to £10,000 on 6 April 2023.

This may give your clients more flexibility to continue working and making tax-efficient contributions to their pensions after they have accessed their savings.

As a result, it’s easier for people to “semi-retire”, drawing from their pensions to supplement income from part-time work.

Indeed, according to PensionsAge, 44% of 55- to 64-year-olds plan to move into semi-retirement before they reach 65.

We can explore the option of semi-retirement with your clients and help them take advantage of the changes to the MPAA. Additionally, we can ensure that they don’t unexpectedly trigger any tax charges if they do access their pension savings while they’re still working.

Get in touch

Your clients could benefit from some guidance if they don’t understand how recent pension tax changes affect them.

They can contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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 performance.

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.