Chancellor Jeremy Hunt Announces Overhaul to Pension Tax Rules
In Chancellor Jeremy Hunt's Spring Budget, he announced an overhaul to pension tax rules in an effort to encourage over-50s to remain in or return to work. This includes the abolition of the lifetime allowance on pensions from April 2024 and the increase of the annual allowance from £40,000 to £60,000 from 6 April 2023. The money purchase annual allowance (MPAA) will also more than double from £4,000 to £10,000 from April 2023.
The LTA was originally introduced at £1.5 million on A-Day in 2006 and gradually rose to £1.8 million by 2010. Upratings since then have seen the LTA grow to £1.1 million. The OBR expects the measures to increase employment by 15,000 workers, while the Treasury's costings put the measure at £835 million a year by 2027-2028.
The changes also amount to a huge inheritance tax break as pensions can usually be passed on free of inheritance tax. It is said that defined contribution pensions are a great way to give your wealth to your family, as they are usually not subject to inheritance tax. Financial firms recommend this as a tax-efficient method. Standard Life Insurance has announced that, with the removal of the lifetime allowance, it is possible for an unlimited amount to be passed on tax-free if the individual dies before the age of 75, or at the recipient's marginal rate once they are older. The statement also suggested that, in the long run, individuals may be able to pass their pension wealth to multiple successive generations.
The Office for Budget Responsibility (OBR) forecasts inflation to fall from 10.7 percent last year to 2.9 percent by the end of the year, Hunt said. The amount of the State Pension increase each year is determined by the inflation figure from the previous September, or wages, whichever is greater, at a rate of 2.5 percent.
Shadow Chancellor Rachel Reeves said: “At a time when families across the country face rising bills, higher costs and frozen wages, this gilded giveaway is the wrong priority, at the wrong time, for the wrong people.”
Hunt said: “I do not want any doctor to retire early because of the way pension taxes work. Taxation should not be a cause for exclusion of individuals from the workforce.
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