Pensions – how taking advice now could make a difference of £1000s

Recent changes to pensions rules have presented potential new opportunities, and traps, and the tax-year-end deadline means thorough advice in this area is pressing.

Many people with significant pension pots have been nervous about making further contributions to their funds, often because of concerns about the Lifetime Allowance charge.  If you are one of them, the changes introduced in 2023 could help you to build a bigger pot for retirement in a tax efficient way.

As we outline below, there are two significant changes to the rules if you are considering contributing to your pension before this tax year end.

Boosting your pension pot got easier – no Lifetime allowance charge and higher annual allowance

The Lifetime Allowance (LTA) charge, which capped the level of tax-advantaged pension savings that could be accumulated over a lifetime, has been abolished from the 2023/24 tax year.  Previously if you had a substantial pension pot you may have been reluctant to make further contributions for fear of exceeding the £1,073,100 limit and incurring a tax charge.  Abolition of the Lifetime Allowance charge could enable you to contribute to what remains a highly tax-efficient structure. The second big change is that the maximum amount you can contribute to a pension each year has increased for 2023/24 to £60,000 from £40,000.

The old Lifetime Allowance remains relevant for calculating tax free cash and death benefits.  If you have claimed any form of Fixed Protection, that will allow you a higher level of tax free cash, but otherwise the tax free cash that you can withdraw from your fund is limited to 25% of £1,073,100 or £268,275.  It means that, if your pot grows to more than £1,073,100, or your higher protected allowance, anything paid as a lump sum above that limit will be taxable at your marginal income tax rate.

Pension Tax Relief before 6 April 2024

Tax relief is given for those contributions made in the tax year, which is why you must act before the end of the tax year on 5 April. To qualify you must be a so-called ‘relevant UK individual’ under the age of 75. Typically, that means that you need to be a UK resident or to have relevant UK earnings. This is usually employment income or self-employment income including income from furnished holiday lets – but not investment or general property income.

How much can you contribute?

For most people, the contributions which can attract relief will be driven by their earned income. The exception is that anyone can make a gross contribution of £3,600 (so £2,880 net) even if they have no income. In such circumstances, the basic rate relief is not clawed back.

Otherwise, the amount that anyone can save in a pension in a tax year is limited to the lower of their relevant earnings (earned income) and the available annual allowance. The available annual allowance is made up of the current year’s £60,000, plus any unused annual allowance from the previous three years. Importantly, you need to have been a member of a registered pension scheme during each of the previous three years to carry this allowance forward to the current tax year. As we mentioned above, the annual allowance increased from £40,000 to £60,000 for this tax year but any unused relief from previous tax years will be at the previous lower limit.

Case Study– how does it work in practice?

Take Bridget, who earns £200,000 per year and who hasn’t made any contributions to her Self-Invested Personal Pension (SIPP) for the past three years due to concerns about the Lifetime Allowance limit.

Should she want to top up her pension, her maximum contributions would be:

YearAnnual allowance (£)Used in tax year (£)Available in 2023/24 (£)

Bridget could contribute a total of £180,000 to her pension scheme before 6 April 2024 with the benefit of tax relief. Unused relief is used on a ‘first in first out’ basis. So, if Bridget only contributes £100,000 to her pension, she will use the current year’s relief, plus £40,000 from 2020/21.

You can only get relief based on your earnings for the current tax year. Let’s say Bridget earned £80,000 rather than £200,000; her capacity to make pension contributions in 2023/24 would be limited to £80,000.  In this case, she would use her 2023/24 allowance, plus £20,000 of the unused capacity carried forward from 2020/21. The remaining £20,000 annual allowance from 2020/21 would be lost.

Clearly getting the income tax relief is important and if you intend to use previous years’ pension relief capacity, it makes sense to get financial planning advice to ensure that you get the numbers right.  In particular, there are situations where the full annual allowance is not available and advice on contribution levels is critical.

  • For those that earn more than £260,000 a year, the annual allowance is tapered down to a minimum of £10,000
  • For those who’ve taken certain pension benefits, the Money Purchase Annual Allowance of £10,000 applies instead of the full £60,000.

Are more pension contributions right for me?

So what does this all mean for pension contributions in the 2023/24 tax year?

Pension saving is, first and foremost, a means of providing for retirement.  To encourage us to save for retirement, the Government gives tax relief for pension contributions on entry to the fund, on growth and partially on withdrawal.  In addition, the fund does not form part of your estate for IHT purposes. 

That all makes pensions highly attractive if you’re paying additional rate tax or if you are caught by one of the system’s tax rate ‘cliff edges’ – losing your personal allowance, for example.

There remains a good deal of uncertainty around the tax position of pensions and pension holders; a change of government could yet see a wholesale transformation of the tax relief environment.  If your pension savings have plenty of room for growth before hitting the old Lifetime Allowance, then making contributions should be a straightforward decision in favour of tax efficiency.

If your fund is at or near the old Lifetime Allowance, the possibility of a reintroduction of a cap on lifetime pension saving needs to be weighed against the other incentives, but the 2023 changes to pension relief limits create top up opportunities which weren’t there a year ago.

Action now

Whatever your pension position, we would welcome a discussion with you about the deadline for contributions this year and how we can help you to build retirement wealth.  Please call your private banking team or submit an enquiry using the button below.

Clare Munro is our Senior Tax Advisor. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.

Important information

This article does not constitute advice.  Tax laws are subject to change and taxation will vary depending on individual circumstances.