Pension schemes did not get a mention in Philip Hammond’s Spring Statement 2019, which will have been disappointing for people hoping to improve their personal finances. However, major changes will come into effect as of April 6 and one of these is a significant rise to the pension lifetime allowance for the 2019/20 financial year. The allowance is the maximum sum you can save tax free in your retirement savings. People need to be careful not to go over this amount as they will be subject to a large fine.
In good news for savers, the allowance is getting a boost because of the link to annual CPI inflation.
This is currently 2.3 percent as of September last year.
It means the lifetime allowance for pension savings will increase from £1,030,000 to £1,055,000 as of April 6.
So people could have an extra £25,000 available in tax-free pensions.
What is the pension lifetime allowance charge?
Any amount that goes above the maximum pension lifetime allowance charge is subject to a tax payment.
This can be paid in one of two ways – either as one charge of 25 percent if paid as an insurance product called an annuity or if you make regular withdrawals from your pension, known as a “drawdown”.
The other alternative is to pay the charge as one lump sum but it is set at a higher 55 percent rate.
To ensure you do not exceed the lifetime allowance amount, monitor your funds regularly.
You can also opt for either a fixed protection or individual protection to account for the fact you may have been planning for higher savings.
People can choose individual protection if their pensions were worth more than £1 million as of April 5, 2016.
This protects their lifetime allowance either at the value of their pensions on April 5, 2016 or £1.25m depending on what is the lowest.
The fixed protection cements the amount at £1.25m but means you can no longer contribute to your pension.
People need to be careful with this option because if you go on to make a payment into your pension, you will lose the fixed protection and be charged.
The tax-free amount you can pay into a personal pension remains at £40,000 per tax year.
Changes are also being made to state pensions.
You can find out more about the Government changes by seeing our state pension news.