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Key takeaways from the Spring Budget 2023

The Spring Budget saw the biggest change to pensions since 2014. The Lifetime Allowance has been abolished completely, with big increases to the Annual Allowance and Money Purchase Annual Allowance.

Here is a summary of the nuances behind the announcements, and how this may affect you.

Annual Allowance has been boosted to £60,000 per year

The Chancellor has increased the pension annual allowance by 50% to £60,000 a year from the current £40,000.

This is a significant increase to the annual allowance which will particularly help those in defined benefit schemes with long service who get a promotion, as well as those whose earnings fluctuate. Many higher paid workers, such as doctors in the NHS, will benefit from this boost to the allowance.

The Lifetime Allowance tax charge has been abolished

In the Budget it was announced that the pension Lifetime Allowance (LTA) will be abolished. The LTA tax charge will be removed with effect from 6 April 2023 with the LTA being fully removed in the future.

However tax-free cash will be limited for most people to the current maximum level of £268,275. This caveat means the abolition isn’t quite as positive as it first appears. While the 55% LTA tax is being removed, benefits above the tax-free cash level will be subject to income tax.

Example of impact

INDIVIDUAL WITH £1.8M PENSION POT

 

FROM 6 APRIL 2023

CURRENT POSITION

LTA

n/a

£1,073,000

TAX FREE CASH

£268,275

£268,275

AVAILABLE FOR TAXABLE INCOME

£1,531,725

£804,750

LTA TAX CHARGE (IF TAKEN AS LUMP SUM)

NIL

£399,850

*For an individual with no protection

The Money Purchase Annual Allowance is increased from £4,000 to £10,000 per year

The Money Purchase Annual Allowance (MPAA) limits the amount that you can contribute to your pension and continue to receive tax relief once you have flexibly accessed your benefits. If you’ve withdrawn £1 more than your 25% tax-free cash allowance through contracts like drawdown, then you’ll be restricted in the amount you and your employer can pay into your pension.

Increasing the threshold from £4,000 to £10,000 will help many lower earners boost their pension saving without fear of triggering a tax charge. This is a small change to the rules that will make a big difference and could even save the Treasury some money through increased employment, economic productivity, and tax receipts.

Salary levels at which the MPAA is relevant, for different MPAA levels and contribution rates

MPAA levels

8%

12%

15%

25.60%

At the current £4,000

£50,000

£33,334

£26,667

£15,625

Reset to £10,000 from 6.4.23

£125,000

£83,333

£66,667

£39,063

Source: Canada Life. 8% is the default auto-enrolment contribution rate. 12% is the minimum required for the Pension Quality Mark. 15% is the rate required for the Pension Quality Mark+. 25.6% is the average contribution rate for a private sector defined benefit pension scheme.

ENDS

Enquiries:

Press enquiries should be directed to:

Elle McAtamney at Canada Life, elle.mcatamney@canadalife.co.uk

Notes to editors

About Canada Life:

Canada Life is part of a group of companies controlled by Great-West Lifeco Inc., a diversified financial services holding company headquartered in Winnipeg, Canada. Through its subsidiary companies, Lifeco has operations in Canada, the United States, and Europe. Great-West Lifeco and its insurance subsidiaries have received strong ratings from major rating agencies.  Great-West Lifeco has over 30 million customers worldwide and £1.341 trillion assets under administration (as at 31 December 2021).

Canada Life Limited began operations in the United Kingdom in 1903 and looks after the retirement, investment and protection needs of individuals and companies alike. As well as providing stability and security through its individual contracts, Canada Life Limited has grown to become the leading provider of competitively priced group insurance solutions. Canada Life acquired Retirement Advantage on 3rd January 2018 for an undisclosed sum. The acquisition added over 30,000 retirement income and equity release customers and more than £2 billion of assets under management including a £1.5 billion block of in-force annuities to Canada Life.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority. Canada Life International Assurance Limited and Canada Life International Assurance (Ireland) DAC are authorised and regulated by the Central Bank of Ireland.

Stonehaven UK Limited, trading as Canada Life, is a subsidiary of The Canada Life Group (U.K.) Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England and Wales. Registered number: 05487702. Registered office: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA.

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