Saving for retirement can often feel like a long-term puzzle, especially when tax rules change, and you’re left wondering how they’ll impact your future. One of the biggest recent shifts in the UK’s pension rules is the removal of the lifetime allowance (LTA), which has many people rethinking their approach to retirement savings.
If you’re unsure what this means, let’s simplify it and explore how to maximise your retirement savings.
Understanding the changes
For many years, the LTA acted as a cap on the total amount you could save into your pension without facing extra tax charges. In the 2023/24 tax year, this allowance was set at £1,073,100. If your pension savings exceeded this threshold, you would have been subject to additional tax when you accessed your funds. However, recent changes have scrapped the LTA altogether, meaning there is no longer a limit on how much you can build up in your pension before tax kicks in.
This shift has left many savers questioning how to take advantage of the change while being mindful of other potential tax implications.
Uncertainty around future pension rules
Removing the LTA is undoubtedly a positive development for many, but it also introduces uncertainty. Will this change be permanent, or could future governments reinstate it? Should you push hard to contribute as much as possible to your pension now, or might there be other tax-efficient ways to save for retirement?
On top of that, the recent abolishment of the LTA does not mean there are no limits to pension tax relief altogether. You still need to consider the annual allowance (AA), which restricts the tax relief you can claim on contributions in any given tax year. For 2024/25, this stands at £60,000. Breaching this could result in a tax charge, so staying within these limits is important to maximise your tax relief.
The risk of missing out on tax efficiency
It’s easy to feel overwhelmed with these changes. Failing to adapt your retirement savings strategy could mean missing out on valuable opportunities. Not knowing how much to contribute or whether to invest more heavily in pensions or other savings vehicles might cost you in the long run. With no fixed LTA, some might feel emboldened to over-contribute, only to be hit with unexpected tax implications elsewhere.
And it’s not just about pensions either – other ways to save for retirement may offer tax advantages. For example, individual savings accounts (ISAs) continue to allow for tax-free growth, although they don’t offer tax relief on contributions like pensions do. Striking the right balance between pensions and other savings options is crucial.
Taking a well-rounded approach to retirement savings
With these changes, now is a great time to reassess your retirement savings plan. To maximise your tax efficiency, here’s what you can do.
- Make full use of the annual allowance
As mentioned, the AA allows you to contribute up to £60,000 annually to your pension and claim tax relief. Even without the LTA, staying within this limit ensures you get the most tax-efficient benefit from your contributions. If you have an unused allowance from the previous three tax years, you can carry it forward, increasing the potential amount you can invest. - Consider salary sacrifice
Salary sacrifice schemes allow you to redirect a portion of your salary into your pension, reducing your taxable income. This increases your pension pot and reduces your national insurance contributions, which can be particularly valuable if you’re approaching retirement age. - Diversify your retirement savings
While pensions offer great tax benefits, it’s worth diversifying your retirement savings across different vehicles. ISAs, for example, allow you to save up to £20,000 annually without paying tax on the income or capital gains. This can provide more flexibility than pensions, especially if you need to access your money before retirement. - Keep an eye on inflation
Removing the LTA presents an opportunity to build up your pension pot significantly, but inflation remains a key consideration. With UK inflation rates remaining elevated in recent years (averaging around 7.8% in 2023, according to the Office for National Statistics), it’s crucial to ensure that your investments outpace inflation to protect the value of your savings. Consider seeking advice on investing your pension pot to ensure long-term growth. - Review other tax implications
While the LTA has been abolished, other tax considerations exist when accessing your pension. For instance, only 25% of your pension pot can be withdrawn tax-free, with the remainder subject to income tax. Given that higher pension pots could push you into a higher tax bracket, planning your withdrawals carefully is essential to avoid paying more tax than necessary.
Take control of your retirement
The changes to the LTA mark a new chapter in retirement planning, offering more flexibility and opportunities for pension savers. By reviewing your pension contributions, exploring other savings options and considering tax efficiency, you can strengthen your position for retirement.
As always, we recommend seeking personalised advice if unsure about the best way to move forward. At John Potter & Harrison, we can help you with these changes and tailor a retirement plan that works for you and your future goals.
Contact us today to get started on your retirement strategy.
