Can I add to my pension again after the £1.1m lifetime allowance was scrapped?

Can I deposit extra money into my pension now that the lifelong allowance has been abolished?

I am a person of retirement age who has not enjoyed the proceeds of a private pension that had exceeded the lifetime limit, and thanks to the Chancellor, I am not now.

I have started receiving my government pension, but my question is if I can add more money to my private pension.

SCROLL DOWN TO FIND OUT HOW TO ASK STEVE YOUR PENSION QUESTION

Steve Webb replies: The March 2023 budget introduced some major changes to pension taxation, especially for those with larger retirement pots, so I’ll try to highlight some of the key things you should be aware of.

I will also address the possibility that a future government could reverse some or all of these changes.

Before I go any further I need to make a few things clear.

– I will focus purely on the budget changes and not on the broader pros and cons of whether you should save more for retirement in your individual situation; you should of course seek advice on broader issues such as the implications for inheritance tax, the level of investment risk you are prepared to take, and so on.

– I assume that you are thinking only of personal contributions to a personal scheme, so not a scheme whereby an employer may save for you.

As you mentioned, a big change in the budget was the pension allowance.

The MJA currently limits the amount of pension that you can accrue for life before an additional tax assessment arises. Following the Budget, the MJA will be abolished as of April 2024.

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 levy would have been applied, only income tax will have to be paid on any withdrawals.

While the LTA will go ahead, the government will put a cap on the amount of tax-free money you can withdraw, setting it at 25 per cent of the current LTA (so 25 per cent of £1,073,100, which is £268,275). .

This limit remains in force, even after the LTA has ended.

However, if you are someone who has a so-called ‘protection’ that allows you to withdraw a larger amount tax-free, that higher amount will still be honored.

(Note, in practice this limit is just one part of some pretty complicated rules about the ability to take tax-free cash.)

You indicate that the value of your pension pot exceeds the lifetime limit. In principle, nothing prevents you from adding to this pot if you would like.

However, the very important additional caveat here is that if you have so-called lifetime benefit protection (particularly one of the fixed or increased protections) and you deposit before April 6, 2023, this protection would be lost and this could have important consequences – for example for your ability to withdraw tax-free money.

Whether you have protection or not, if your assets already equal or exceed your lifetime benefit, additional contributions may not increase your ability to withdraw tax-free due to the above limit.

The usual rules apply to how much you can contribute for your pension in 2023/24.

– The annual stipend still applies (above which contributions will charge AA fees), although with an increased cap of £60,000 (for all but those on the highest incomes) this may not be such a big constraint, especially if you have unused AA can be carried over from previous years.

– The money purchase annual fee remains applicable; for example, if you have tapped into a ‘pot of money’ pension (over £10,000) and withdrawn taxable cash, you would only be allowed to contribute £10,000 per year from 2023/24 without the AA levy applying.

– Crucially, you are only exempt to the extent your contributions come from your earnings – if you have stopped working, you can only contribute £3,600 (excluding tax relief) if your ‘relevant UK income’ is less than this figure.

In terms of the attractiveness of retirement savings, you should think carefully about the tax relief you receive on your deposits compared to the tax you pay on the benefits you ultimately receive.

For example, if you’re currently a base tax payer, you get a 20 percent tax break on the money you put into a pension, but if you withdraw your retirement pot quickly, you might end up paying 40 percent tax later, which may not be much.

An important variable that is difficult to predict is what might happen if there was a change of government.

As you may have seen, the Labor Party has said that if it takes office it will reverse these changes and reintroduce a lifetime allowance. But there is still little information about what that would mean in practice.

In the past when the LTA was cut the government implementing the cut has put in place various ‘protections’ so that those who have already exceeded the limit and with some unstarted funds don’t lose, but at this stage there is no guarantee that this will happen. happen again.

Therefore, please think carefully about taking steps now that may leave you with a large tax bill if the rules change in the future.

Given the amount of money we are talking about, I strongly recommend that you seek expert financial advice so that you can make the right decision in your individual situation.