Since introducing pension freedoms legislation in April 2015, we have seen significant changes across the UK pension sector. These include a new state pension scheme, flexible access to defined contribution pension assets, and changes to the state pension age. However, the UK government recently introduced further changes that will impact short, medium and long-term returns.
Extension of voluntary National Insurance Contribution deadline
As part of the introduction of a new state pension scheme in April 2013, the UK government extended the period for voluntary National Insurance Contributions (NICs) by a further ten years. Covering the period from 2006/7 to 2016/17, this is in addition to the existing legislation allowing individuals to fill gaps going back six years. Originally the 10-year extension was due to end on 5 April 2023, but this has been extended to 31 July 2023.
It is vital to take advice regarding voluntary NICs, as those with sufficient qualifying years to claim the full state pension wouldn’t see an increase in pension payments.
Increase in pension contribution allowance
On 15 March 2023, the Chancellor of the Exchequer, Jeremy Hunt, announced several changes to pension legislation. One of the surprise tweaks was an increase in the annual pension allowance, which is the maximum annual pension contribution on which tax relief can be claimed. The previous £40,000 per annum rate was replaced by a £60,000 allowance at the start of the 2023/24 tax year. This means those eligible to contribute up to £60,000 into their pension scheme can claim tax relief on the total amount.
The cumulative impact of this increase, together with tax relief, has the potential to enhance long-term pension fund returns significantly.
Abolition of the lifetime allowance
The abolition of the Lifetime Allowance (LTA) was welcomed across the board, removing the threat of tax penalties for those exceeding the current LTA of £1,073,100. Consequently, many who stopped contributing to their pension scheme amid concerns about exceeding the LTA may decide to revisit this decision. Strictly speaking, the LTA will be abolished from 6 April 2023 but won’t be removed from the statute books until April 2024.
Those with fixed protection should be able to make additional pension fund contributions from the start of the 2023/24 tax year while still maintaining their maximum tax-free cash entitlement. Even though pension plans without protection can increase investments beyond the existing LTA, the tax-free cash entitlement will be limited. Under the new legislation, the maximum tax-free lump sum will be capped at £268,275 (25% of the LTA).
Planning your retirement
On the one hand, the government has abolished the LTA, but on the other, they have limited the maximum tax-free lump sum for those without pension protection. However, the increase in the pension contribution allowance and the ability to utilise unused allowances over the previous three tax years will prompt many to revisit their contribution strategy.
We have seen several significant changes in pension regulations over the last decade, with more expected in the years ahead. As a result, simple tweaks to your contributions today could significantly impact your long-term returns. Consequently, it is essential to discuss the options with your financial adviser.
Get in touch
For more information on pension changes and maximising your retirement fund, get in touch to discuss your situation and options with one of our pension experts, or email us at admin@cedarhousefinancial.co.uk.