Can I add extra funds to my pension now the lifetime allowance has been scrapped?
I am a person of retirement age who has not taken the proceeds of a private pension which was over the lifetime limit, and thanks to the Chancellor it is not now.
I have started receiving my Government pension, but my question is can I add more funds to my private pension.
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Retirement plan: Can I add to my pension again after the lifetime limit was scrapped?
Steve Webb replies: The March 2023 Budget introduced some big changes to the taxation of pensions, especially for people with larger pension pots, so I will try to highlight some of the main things that you need to be aware of.
I will also touch on the possibility that a future Government could reverse some or all of these changes.
Before going any further, a few things I should make clear.
– I will focus purely on the Budget changes and not the wider pros and cons of whether you should save more in a pension in your individual situation; you should obviously seek advice about wider issues such as the implications for inheritance tax, the amount of investment risk you want to take and so on.
– I am going to assume that you are only thinking about personal contributions to a personal scheme, so not a scheme where an employer might be funding savings for you.
As you mention, a big change in the Budget was to the pension lifetime allowance.
At present, the LTA limits the amount of pension you can build up over your lifetime before triggering an additional tax bill. Following the Budget, the LTA is to be abolished from April 2024.
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However, the Government did not have time to pass all the necessary legislation to abolish the LTA from April 2023, so for 2023/24, where the LTA charge would have applied there will just be income tax to pay on any withdrawals.
Although the LTA is going, the Government is keeping a cap on the amount of tax-free cash you can take, and it is setting this at 25 per cent of the current LTA (so 25 per cent of £1,073,100 which is £268,275).
This limit will remain in place even after the LTA has gone.
However, if you are someone who has what is called ‘protection’ which allows you to draw a larger amount tax free, that higher figure will still be honoured.
(Note, in practice this cap is only one part of some quite complicated rules on scope for taking tax free cash.)
You mention that the value of your pension pot is in excess of the lifetime limit. In principle, there is nothing stopping you adding to this pot if you wish to do so.
However, the very important extra caution here is that if you have what is called lifetime allowance protection (specifically one of the fixed or enhanced protections) and you make contributions before 6 April 2023 this protection would be lost and this might have important consequences – for example, for your scope to draw tax free cash.
Whether you have protection or not, if your funds are already at or above your lifetime allowance, extra contributions may well not increase your scope to take tax free cash because of the cap noted above.
In terms of how much you can put into your pension in 2023/24, the usual rules apply.
– The annual allowance still applies (above which contributions trigger an AA charge), though with an increased limit of £60,000 (for all but those with the highest incomes) this may not be much of a constraint, especially if you have unused AA you can carry forward from earlier years.
– The money purchase annual allowance still applies; if, for example, you have tapped in to any ‘pot of money’ pension (over £10,000) and taken taxable cash, you would only be allowed to contribute £10,000 per year from 2023/24 onwards without the AA charge applying.
– Crucially, you only get relief to the extent that your contributions are from your earnings – if you have stopped work, you can only contribute £3,600 (gross of tax relief) if your ‘relevant UK earnings’ are lower than this figure.
In terms of the attractiveness of saving in a pension, you need to think carefully about what tax relief you will get on your contribution compared with the tax you will pay on the benefits you eventually draw.
For example, if you are currently a basic rate taxpayer you will get 20 per cent tax relief on the money you pay into a pension, but if you drew down on your pension pot rapidly you might end up paying 40 per cent tax later in retirement, which might not be a great deal.
One key variable which is hard to predict is what might happen if there were to be a change of Government.
As you may have seen, the Labour party has said that if it takes office it would reverse these changes and reimpose a lifetime allowance. But there is still very little information about what that would mean in practice.
In the past, when the LTA has been cut, the Government doing the cutting has introduced various ‘protections’ so that those already over the limit and with some unstarted funds do not lose out, but at this stage there is no guarantee that this would happen again.
You should therefore think carefully about taking steps now which might land you with a large tax bill in the event that the rules change in future.
Given the amount of money we are talking about, I would strongly recommend that you take expert financial advice so that you can make the right decision in your individual situation.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.