Early retirement is a priority for many people – but in light of recent pension legislation changes, working for longer could be beneficial. Here’s why.
If you’ve worked hard all your life, one of your main priorities may be to retire as early as you can.
Indeed, retiring early has become a goal for many executives and business owners who wish to make up the time with friends and family that they’ve sacrificed for a successful career.
Now in light of recent pension legislation changes, many high earners have decided to delay their retirements after all – and for good reason.
In his 2023 spring Budget, chancellor Jeremy Hunt announced a number of key pension developments that could change the game for high earners looking to build up a substantial pot tax-efficiently.
Now that these changes have come into force, find out why delaying your retirement could be a good thing after all – and how we can help you make the most of these new opportunities.
Jeremy Hunt removed the Lifetime Allowance tax charge in April 2023
One of the most notable changes made to pensions is that the Lifetime Allowance (LTA) tax charge has now been removed.
The LTA, which stood at £1,073,100 in the 2022/23 tax year, marked how much pension wealth an individual could hold before having an extra tax charge applied when they withdrew the funds.
Under previous LTA rules, if you had more than £1,073,100 across all the pensions you held, you could have received a 55% tax charge if you drew your pension as a lump sum, or 25% if you took your pension flexibly (this charge would be on top of your marginal rate of Income Tax).
However, in April, Jeremy Hunt removed the LTA tax charge, announcing that the LTA would be completely abolished in a future Finance Bill.
This change means that pension holders can now save a potentially unlimited amount into their pensions without triggering an additional tax charge (regular pension tax charges may apply as normal).
As a result, in a study of prospective or current retirees published by Professional Adviser, 23% of participants said they have delayed or will delay their retirement.
What’s more, 10% said they were coming out of retirement now that the LTA is gone, and those increasing their pension contributions are putting in an average of £650 more each month.
Ultimately, the removal of the LTA might have prompted you to shift your plans, even if you had originally wished to retire early.
If you had stopped paying into your pension altogether for fear of breaching the LTA, you could now continue to route a large portion of your earnings into a pension. You may also choose to extend your career for a few years to capitalise on this opportunity.
The Annual Allowance now stands at £60,000 – a £20,000 increase on last year
The Annual Allowance marks how much most earners can pay into a private pension each year while receiving tax relief on their contributions.
In line with the timely removal of the LTA tax charge, the chancellor also increased the Annual Allowance from £40,000 to £60,000 (or your total earnings, whichever is lower), starting from April 2023.
If your “threshold income” is more than £200,000, or your “adjusted income” is higher than £260,000, your Annual Allowance may be tapered accordingly. Plus, if you’re already taking your pension flexibly, the Money Purchase Annual Allowance (MPAA) is usually applied, meaning your Annual Allowance is limited at £10,000.
The rules around claiming tax relief within the Annual Allowance are complex, but the bottom line is that there is now a greater window for tax-efficient savings than in the 2022/23 tax year.
Coupled with the LTA being scrapped, the Annual Allowance increase could mean that delaying your retirement for just a few years could help you to save a meaningful amount in a short time period.
For instance, if you delayed your retirement until 2026/27 and routed the full £60,000 Annual Allowance into your pension each year, you could boost your pension by £180,000 in just three years.
Plus, higher- and additional-rate taxpayers can claim tax relief on these contributions through self-assessment, further capitalising on the tax-efficient pension opportunities that have arisen this year.
Consulting a financial planner can help you time your retirement strategically
Ultimately, your retirement goals will be unique to you. Delaying retirement for a few short years could hugely benefit you down the line, but it’s important to weigh up this opportunity against the retirement plans you’ve already made.
Your Kellands financial planner can help you:
· Review your prospective retirement income as it stands
· Calculate how much more you could save after the LTA removal and Annual Allowance increase
· Adjust your career prospects to suit your saving and investing goals
· Discuss a potential delay in retirement with your wider family.
We can help you maximise financial opportunities while upholding your cherished life goals.
To discuss anything you’ve read here, email us at firstname.lastname@example.org, or call 0161 929 8838.
All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.