Understanding the Latest Pension Updates: What You Need to Know

With a new tax year comes new changes to the rules that govern our finances. There have been many changes this time around so let’s review the changes to pensions.

State Pension

The current government has stuck with the triple lock, which means as of this month, state pension has increased by 8.5%. This is in line with average earnings growth between May and July 2023, the second largest increase on record.

Those who qualify for the new state pension will now receive £221.20 per week, up from £203.85. If you reached state pension age before April 2016 and are on the older basic state pension, this will increase to £169.50 per week from £156.20.

You can check at what age you will become eligible for the state pension on the government’s website. State pension age rose to 66 for both men and women in 2020 and is due to increase to 67 between 2026 and 2028 with speculation it will increase further after this.

The age you can access your private pension is also increasing from 55 to 57 from 6th April 2028.

Lifetime Allowance

Last year, the chancellor announced the lifetime allowance was to be abolished. This was the limit (£1,073,100 at the time) before the lifetime allowance tax charge would come into effect.

It is worth noting that a likely change of government at the next election may change the issue again, possibly even reinstating the lifetime allowance. There has been nothing said for certain yet and as the parties produce their manifestos, we should know more.

The limits from the old lifetime allowance remains in the form of the lump sum allowance, lump sum death benefit allowance and overseas transfer allowance.

Lump Sum Allowance

The previous cap for taking tax-free cash from your pension was set at 25% of your total pensions (up to 25% of the old cap of £1,073,100) at the time of taking the tax-free cash. As the lifetime allowance has now been removed however, there is still a limit for tax-free cash and this is now set at the monetary lump sum allowance of £268,275 (25% of the old lifetime allowance), unless you have protection.

Any amount of pension commencement lump sum or the untaxed part of an uncrystallised funds pension lump sum already taken is deducted from this allowance.

Lump Sum Death Benefit Allowance

This applies at the crystallisation event when you die or on payment of a serious ill-health lump sum. The allowance up to £1,073,100, but it is important to remember that any tax-free cash already taken is deducted from this amount.

There are some benefits not tested against this allowance, such as a trivial commutation or a gift to charity.

Overseas Transfer Allowance

If you wish to transfer your pension overseas (QROPS), the limit is the same as the old lifetime allowance of £1,073,100. This is separate from your lump sum allowance and lump sum death benefit allowance, so a transfer overseas will not reduce these allowances. Previous overseas transfers will reduce this allowance.

It is also worth remembering that these types of transfers will incur tax at 25%, with certain exceptions.

Pensions can be complex and opaque as the rules and allowances are complex and regularly change. This article provides general information and not personalised advice. If you would like more information and assistance with your own pension and overall finances, then please get in touch and we will be happy to help.