The 2020 Budget made some significant changes to the Tapered Annual Allowance that could affect your retirement plans. With the announcements coming into effect for the 2020/21 tax year, it could impact how much you can save tax-efficiently into a pension.
The changes to the Tapered Annual Allowance follows senior NHS consultants and clinicians facing tax penalties if they took on overtime work or additional duties, placing stress on the healthcare system. It’s an issue that caught the attention of headlines and emergency measures for NHS staff were introduced several months ago.
Now, the Chancellor has changed the Tapered Annual Allowance rules, which will affect pension savers outside of the NHS. He didn’t go as far as scrapping the Tapered Annual Allowance, which some had called for, but the changes do mean many high earners will be able to save more efficiently in their pensions.
There are two key changes to the Tapered Annual Allowance to be aware of:
1. Tapered Annual Allowance thresholds
The maximum Annual Allowance available to pension savers is £40,000. However, several factors may mean your Annual Allowance is lower, this includes being affected by the Tapered Annual Allowance.
Previously, the Tapered Annual Allowance would come into effect if your threshold income exceeded £110,000 or your adjusted income exceeded £150,000. For every £2 earned above these thresholds, the amount you can efficiently save into a pension would reduce by £1 to a minimum level, which we’ll look at in the next point.
Both the above thresholds have increased by £90,000. This means individuals can now have a threshold income of £200,000 or an adjusted income of £240,000 before the Tapered Annual Allowance has any impact.
2. Minimum Annual Allowance lowered
In 2019/20, the Tapered Annual Allowance could reduce by a maximum of £30,000, taking it to £10,000 for some savers. However, this has now been lowered even further. Some pension savers could find they have an Annual Allowance of just £4,000 if their income exceeds £312,000.
Exceeding this allowance can result in significant tax bills, so it’s important to be aware of what your Annual Allowance is.
Who are the winners and losers?
With any changes to pension savings, there are always ‘winners’ and ‘losers’.
For many high earners, the increased thresholds for the Tapered Annual Allowance will mean they’re able to save more into their pension without worrying about additional tax charges. For those that are still affected, some will find their Annual Allowance is higher as a result. These are the clear ‘winners’ in the policy. If you fall into this category, you should look at whether increasing pension contributions is right for your financial plans and goals. For the majority of people, saving into a pension is the most efficient way to save for retirement.
The ‘losers’ in this instance are those savers that will see their Annual Allowance fall from £10,000, potentially down as far as £4,000. With a lower allowance, you may find current contribution levels are no longer efficient and alternatives may need to be considered.
What can you do if the amount you can save into a pension is reduced?
If you find that your Annual Allowance has reduced, don’t panic. There are different ways you can save for your retirement, which may include investing or increasing investments outside of your pension.
What’s key here is that your goals and risk profile are considered. If you hope to retire in just a few years, your plan for making up the difference in Annual Allowance will be very different if retirement is still several decades away. This is where we can provide support. We’ll help you understand how much you need for retirement aspirations and what your options are for achieving this. We aim to provide you with confidence in your pension planning, even if the recent Budget means some changes are necessary. Please get in touch if you have any concerns.
A rise in the Lifetime Allowance
It’s also worth noting that the Lifetime Allowance, the threshold for tax-efficient pension saving over your lifetime, also increased. This allowance increased by 1.5% in line with inflation. As a result, the Lifetime Allowance is now £1,073,100. Crossing this threshold can lead to hefty financial penalties when you access your pension.
If you’d like to discuss pension contributions and retirement plans in light of these changes, please contact us. We’re here to help you get the most out of your pension and find alternatives for retirement savings if necessary.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.