How to make the most of higher pension allowances

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Let’s rewind to spring 2023 for a moment. We had some milder temperatures, the days were longer, and the government announced increases to pension allowances. Now, with the end of the tax year approaching, it’s a good time to brush up on what increased. So here’s a recap – plus three tips to make the most of the higher allowances before 5 April 2024.

Which allowances increased?

Annual allowance

The annual allowance is the total that can be paid in across all your pension plans in a tax year without you facing a tax charge. 

On 6 April 2023, the standard annual allowance rose from £40,000 to £60,000. If your yearly salary is less than £60,000, your annual allowance is usually 100% of your earnings instead. 

Money purchase annual allowance

If you start taking money from your pension plan and want to keep paying into it, you can trigger the money purchase annual allowance. This can happen if you take taxable lump sums or if you opt for a flexible income (drawdown). It can also happen if you buy a flexible or investment-linked annuity where the income you get could go down. 

You won’t normally trigger it if you just take your tax-free lump sum or buy an annuity that gives you a guaranteed income for life (and where that income stays the same or rises). To find out more about when you may trigger the money purchase annual allowance, visit MoneyHelper.

In times gone by, triggering the money purchase annual allowance meant only £4,000 could be paid in across your plans in a tax year before you faced a tax charge. But the government increased this to £10,000 on 6 April 2023.

Tapered annual allowance

Previously, you could trigger something called the tapered annual allowance if you had an ‘adjusted income’ of £240,000. But as of 6 April 2023, it only impacts people with an adjusted income of £260,000. Find out more about what this means on GOV.UK. 

Before, your allowance could drop to as little as £4,000 if you were affected. But the minimum tapered annual allowance has risen to £10,000.

You can get more detail on MoneyHelper. 

If you think you might be affected, it could be worth speaking to a financial adviser. If you don’t have one, you can find one on Unbiased. You can check if a financial adviser has been authorised by the Financial Conduct Authority (FCA) at FCA.org.uk.

Tips to try before the tax year ends

Overall, people can now pay more into pension plans than they previously could in a tax year without facing an extra tax charge. Don’t forget, a pension is an investment. Its value can go down as well as up and you could get back less than was paid in.

With last spring’s changes in mind, here are three things you can do before the end of the tax year that could benefit you.

1. Review what you’re paying into a pension plan

Currently paying into a pension plan? Once you understand which allowance affects you, it’s worth checking how much you’re putting into it and making sure that’s still right for you.

Your salary may have changed in the past year, for example, so it’s important to ask yourself whether the amount is still right for your circumstances.

Keep in mind that you can get tax benefits on payments you make into a pension plan. 

You may be able to check and change your payments into your pension plan online, if you have an online account with your provider. Or if your provider has an app, you might be able to do it there.

If you have a workplace plan, you may need to speak to your employer to find out how to change your payments. 

2. Ask about matching

Got a workplace pension plan? Your employer usually needs to pay a minimum of 3% of your ‘qualifying earnings’ into it (your earnings between a lower limit of £6,240 and an upper limit of £50,270). Your minimum is normally 5%.

Some employers may pay in more than the minimum. Some might even match your payments up to a certain amount. So now might be the perfect time to check if they’re willing to do this kind of matching.

3. See if you can carry over unused allowances

If you’ve already used your annual allowance for the 2023/24 tax year, you might be able to carry forward unused allowances from the last three tax years. You can’t do this if you’ve triggered the money purchase annual allowance, though.

You need to use unused allowances from earliest to most recent. So if you have unused allowance from three years ago, you’d need to use that first. 

To check who can carry forward unused allowances and whether you yourself have unused allowances, you can visit GOV.UK. 

Ready for a top-up?

To take advantage of your pension plan’s tax benefits before 5 April, you might decide to make a single payment into your plan or increase your regular payments.

If you’ve got a Standard Life plan, you may be able to do this online. Remember, if you’ve got a workplace plan with us, you may need to ask your employer how to change your payments.

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The information here is based on our understanding in February 2024 and shouldn’t be taken as financial advice.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

Standard Life accepts no responsibility for information in external websites. These are provided for general information.