Boosting Your Pension: Understanding New Tax Benefits and Rules

If you’ve been hearing about the latest changes to pension rules in the UK, you’re not alone. In today’s Inews Money Clinic, a reader asked for help to clarify how they would affect him.

I’m about to turn 55 and I’m thinking of taking 25% of my pension pot as tax-free cash. But I’m still working and don’t need the income right now. I’ve not added much to my pension recently because I was worried about hitting the maximum limit. However, with the recent government changes, can I add more to my pension using allowances I haven’t used in the past years? Specifically, can I take out £268,000 tax-free and then put back £180,000?

Let’s break down the reply.

Breaking Down the Pension Basics

Accessing Your Pension Pot

From age 55, people with defined contribution (DC) pensions can take up to a quarter (25%) of their savings tax-free. But, in 2028, this age will rise to 57. To get this tax-free cash, you’ll need to decide how you want the rest of your pension to be paid – either keep it invested (drawdown) or buy an insurance product (annuity) to give you a fixed income.

The Changes in the Pension World

  1. Lifetime Allowance Charge Abolished: In the past, there was a maximum limit on the total amount you could hold in your pension without facing extra tax charges. This was called the lifetime allowance. Good news – this charge has now been scrapped! From April 2024, this limit will disappear altogether. The maximum tax-free cash you can claim remains at £268,275.
  2. Increased Annual Allowance: Currently, the most you can put in your pension each year is £60,000. However, if you take taxable income from your pension, this maximum drops drastically to £10,000.

Carrying Forward Unused Allowances

You might have heard about “carry-forward” rules. This simply means that if you haven’t maxed out your pension contributions in the past three years, you could add more this year, using up those allowances. For the 2023/24 tax year, the maximum you could put in, using these rules, is a whopping £180,000. However, the amount you contribute can’t be more than what you earn in a year.

The Potential Pitfalls

While the recent changes sound tempting, there are some things to watch out for:

  1. The Recycling Rule: There’s a risk in taking out your tax-free cash and then immediately putting it back into your pension. This could go against the HMRC’s “recycling” rules, which could land you with a big tax bill. So, tread carefully!
  2. Inheritance Tax Implications: If you take out your tax-free cash, it’ll be counted as part of your estate if you pass away. This means it might be subject to inheritance tax.

The Best Advice? Talk to an Expert

Given the many considerations and the big money at stake, it’s a smart move to get some professional advice. Speaking to a regulated financial adviser can help make sure you make the best decisions for your pension pot.