Chancellor Jeremy Hunt has removed restrictions on how much highly paid workers can save in a pension in his Budget 2023.
Hunt announced three pension measures designed to encourage older workers to stay in their jobs rather than retire.
But Labour claims the new rules only benefit the rich and have pledged to reverse the policy.
Budget 2023 Pension Changes
The controversy is over how much someone can save into a pension without paying a tax penalty.
Hunt has removed the cap on lifetime pension savings – called the lifetime allowance or LTA. The cap is currently £1.073 million across all a saver’s pensions and was due to remain in place until April 2026.
Savers breaking through the cap face a tax penalty of 65 per cent of the amount saved above £1.073 million. Research shows only a small number of workers are on track to breach the LTA – roughly 1.4 million savers who make up just four per cent of the workforce.
Before the Budget, speculation hinted that the LTA was going to rise to £1.8 million.
Instead, the Chancellor abolished the LTA from April 2024, although the tax penalty is lifted from April 6.
The second change is increasing the limit on how much a retirement saver can put into a pension each year – called the annual allowance.
Currently, the allowance is £40,000 a year, but from April, this rises to £60,000.
Tied in with the annual allowance increase is the Money Purchase Allowance. This sets the amount a saver can pay into a pension once they have started to draw down on the fund.
This allowance rises £6,000 a year, from £4,000 to £10,000 from April.
Why Are The Rules Changing?
Changing the rule is dangling a financial carrot in front of the highly paid.
The government is concerned that savings limits and tax penalties are leading to senior doctors retiring early or cutting the number of hours they spend treating patients. This lack of capacity is leading to longer National Health Service waiting lists.
The Chancellor says scrapping the LTA will cancel tax charges for 80 per cent of NHS doctors and would “incentivise our most experienced and productive workers to stay in work for longer.”
The Treasury expects the pension changes to cost about £1 billion a year in lost tax.
How The Rates Have Changed
Successive Chancellors have tinkered with the LTA since Labour introduced the limit in 2006.
The Tories brought in the annual allowance in 2011.
The tables below show the standard rates for each tax year:
| Tax year | Lifetime allowance | Annual allowance | Government |
| 2024/2025 | £0 | £60,000 | Tory |
| 2023/2024 | £1,073,100 | £40,000 | Tory |
| 2022/2023 | £1,073,100 | £40,000 | Tory |
| 2021/2022 | £1,073,100 | £40,000 | Tory |
| 2020/2021 | £1,073,100 | £40,000 | Tory |
| 2019/2020 | £1,055,000 | £40,000 | Tory |
| 2018/2019 | £1,030,000 | £40,000 | Tory |
| 2017/2018 | £1,000,000 | £40,000 | Tory |
| 2016/2017 | £1,000,000 | £40,000 | Tory |
| 2015/2016 | £1,250,000 | 6 April 2015 to 8 July 2015 — £80,000 9 July 2015 to 5 April 2016 — £0 | Tory |
| 2014/2015 | £1,250,000 | £40,000 | Tory |
| 2013/2014 | £1,500,000 | £50,000 | Tory |
| 2012/2013 | £1,500,000 | £50,000 | Tory |
| 2011/2012 | £1,800,000 | £50,000 | Tory |
| 2010/2011 | £1,800,000 | Tory | |
| 2009/2010 | £1,750,000 | Labour | |
| 2008/2009 | £1,650,000 | Labour | |
| 2007/2008 | £1,600,000 | Labour | |
| 2006/2007 | £1,500,000 | Labour | |
Will The Changes Affect A SIPP?
Many expats have international SIPPS – short for self-invested pension plans. These are UK personal pensions governed by the LTA , annual allowance and money purchase allowance rules.
Will The Changes Affect QROPS?
QROPS are offshore pensions for British expats governed by rules supervised by HM Revenue & Customs.
QROPS stands for the Qualifying Recognised Offshore Pension Scheme.
The rule changes do not impact how the expat pensions work, but do alter the amount a retirement saver can transfer from a UK personal pension to a QROPS.
At the moment, the transfer amount is tested against the LTA.
If the transfer is higher than the LTA, the amount above the limit is taxed at 65 per cent, so tax is £650 for every £1000 transferred. However, the LTA is no longer applied once the fund is moved to a QROPS.
From April, the LTA test is abolished and expats can transfer a pension fund of any size to a QROPS.
The annual allowance and money purchase allowance rules do not affect a QROPS.
Will The Changes Affect A Public Service Pension?
Pensions for public sector workers and the civil service have the same LTA and annual allowance rules as private pensions.
Will The Changes Affect The State Pension?
The State Pension works in a different way from other pensions.
The amount someone is entitled to claim depends on how many years of national insurance contributions (NICs) that they have banked.
To get the state pension, someone must have paid between 10 and 35 years of NICs. The monthly pension payment is pro rata against the number of NICs qualifying years.
Each year, the state pension rises by a set amount called the triple lock.
The triple lock is the highest of 2.5 per cent, the rate wages have increased or the rate of inflation. The triple lock was introduced by David Cameron’s Tories in 2010 and aims to stop inflation or wage increases outpacing the state pension
This year, inflation is the highest of the three options, which means the state pension increases by 10.1 per cent from April 6, 2023.
How much is the state pension worth?
This takes the payments to:
- £203.85 a week (up from £185.15) for the full flat-rate state pension for those who reached state pension age after April 2016
- £156.20 a week (up from £141.85) for the full basic state pension for those who reached state pension age before April 2016
The maximum state pension is £10,600 a year from April.
Although Budget 2023 makes no changes to state pension rules, the age workers can claim the payments are rising.
State pension age is currently 66 years old, but will rise to 67 by 2028 and 68 by 2046.
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