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Chancellor Jeremy Hunt has confirmed the pension lifetime allowance of £1.074million is being scrapped as of next year. This comes as the Government is looking to entice more older people into remaining in the workforce by giving them the opportunity to earn more retirement savings.
As well as this, Jeremy Hunt also revealed that the annual allowance for pensions would be raised from £40,000 to £60,000.
The Money Purchase Annual Allowance is also being increased from £4,000 to £10,000 for the next tax year.
This particular allowance was created to prevent people from trying to avoid tax on current earnings or gain tax relief twice after leaving the workforce but accessing their retirement pot.
However, a little-known pension rule could see Britons put away £180,000 into their pensions in 2023/24.
Known as “carry forward”, it allows unused annual pension allowance from input periods ending in the three previous tax years to be used.
These are then added to the annual allowance for the current pension input period which gives Britons a retirement boost.
With last week’s changes from the Chancellor, the amount someone can put away thanks to “carry forward” is now even greater.
Experts are sharing that older Britons now have the opportunity to save as much as £180,000 next year into their pension pots.
Speaking exclusively to Express.co.uk, Alice Haine, a personal finance analyst at Bestinvest, broke down the savings made available thanks to this pension rule.
She explained: “An individual could potentially subscribe up to £180,000 in pensions next year.
“This could be achieved by using the new, larger £60,000 gross annual allowance and then mopping up unused allowances of £40,000 for each of the previous three tax years under the pensions ‘carry forward’ rules.
“For couples where both are taxpayers, the new rules mean they could potentially shelter up to £120,000 per tax year in their pension after April 6, the equivalent of £1.2 million over 10 years if they max out their pension contributions – as long as they both earn upwards of £60,000.”
One of the main criticisms of the Government’s decision to reform pension allowances is that is considered by many to be a tax break for the rich.
Specifically, the abolishment of the lifetime allowance is likely not to benefit middle and lower-income households as much as higher earners.
However, Ms Haine cited that reform was necessary as the lifetime allowance had failed to keep pace with inflation and wage rises.
The finance expert praised the hike to the annual allowance which will allow people to be bolder with their pension savings.
Ms Haine added: “People who might already have sizeable pension pots at risk of breaching the current limit of £1.073million will benefit the most as they can now direct more of their money into pensions and see it grow without fear of hefty tax charges.
“One of the key criticisms of the lifetime allowance is that it penalised people who had made sound investment decisions as it is a tax that applies to the growth of a pension, not just the amounts subscribed.
“Even middle-income earners that have consistently paid more modest sums into their pension over the course of their career were facing the ramifications of their pension growing and compounding with time putting them at risk of overshooting the lifetime allowance.
“Of course, most of the population aren’t in danger of breaching the LTA and are unlikely to be able to contribute £60,000 gross to a pension – but that doesn’t mean they won’t want to in the future or look to utilise it on an ad hoc basis.”
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