After some relatively quiet years in pension tax, the Chancellor, Jeremy Hunt, announced some significant changes in his budget speech on 15 March 2023, which will impact those approaching retirement. The annual allowance, lifetime allowance and the tax-free lump sum have all been subject to reform.

With effect from 6 April 2023, the annual allowance will be increased to £60,000. Tapering will still apply to high earners, with the income threshold now starting at £260,000 rather than £240,000.

The minimum Tapered Annual Allowance will increase to £10,000 from April 2023.

The Money Purchase Annual Allowance, for those who have already taken benefits from their pension, will also be increased from £4,000 to £10,000.Any unused allowance can still be carried forward from the previous three tax years.

The Lifetime Allowance will be removed from 6 April 2023 and will be abolished completely in future legislation. The changes only apply from the beginning of the new tax year, on 6 April 2023. Unfortunately, those who have recently incurred a Lifetime Allowance Charge will still be liable to pay the tax.

The Pension Commencement Lump Sum (commonly known as the 25% tax-free lump sum) will be subject to a maximum cap of £268,275 and frozen at that limit. This means that even if your pension exceeds the soon-to-be abolished Lifetime Allowance, you can still only draw £268,275 tax-free (not 25% of the fund).

The position for those with some form of fixed or individual protection in place is currently unclear. Initially, it appears that fixed protection holders could restart pension contributions given that the Lifetime Allowance has been removed. However, if the protection allows for lump sum payments, based on the protected amount, it may be beneficial to retain those rights and not recommence contributions in order to benefit from the higher tax-free payment.

We will provide further updates on this in due course.