2 Budget pension changes you should know about

Traditionally, the build-up to any Budget has included speculation as to what changes are going to be made to pension legislation. Indeed, we ourselves came up with a pensions wish list for 2020.

In recent years, the industry has got used to no major changes being announced, and this has been of great relief. However, this year there had been increasing pressure to address the situation involving NHS doctors, where an increase in working hours, and therefore pay, was seeing them penalised for exceeding their annual allowance via the NHS defined benefit scheme.

It may seem as if it happened in a different lifetime, but this year’s Budget was only six weeks ago! Here’s your guide to the main Budget issues affecting pensions.

Tapered Annual Allowance thresholds increased

Our view is that the Tapered Annual Allowance (TAA) is one of the more unnecessarily complex pieces of pension legislation. It is designed to reduce the amount of tax-relievable contributions high earners can pay to registered pension schemes, however applying it can cause confusion.

Put simply, for every £2 of adjusted income an individual earns over a certain amount their annual allowance drops by £1. Before this Budget, this level of adjusted income was set at £150,000. The minimum that someone’s Annual Allowance could reduce to would be £10,000, where an individual had an adjusted income of £210,000 or more.

The new rules retain the same principles; however, the numbers have changed. Now the tapering does not start until someone has an adjusted income of £240,000, after which the Annual Allowance drops £2 for every £1 over until this reaches a minimum £4,000; this is where an individual has an adjusted income of £312,000 or more.

Here’s a comparison of how the changes affect the Annual Allowance at various adjusted income levels:

Adjusted Income 2019/20 TAA 2020/21 TAA
Up to £150,000 £40,000 £40,000
£170,000 £30,000 £40,000
£190,000 £20,000 £40,000
£210,000 £10,000 £40,000
£230,000 £10,000 £40,000
£250,000 £10,000 £35,000
£270,000 £10,000 £25,000
£290,000 £10,000 £15,000
£300,000 £10,000 £10,000
£312,000 and over £10,000 £4,000

Remember that ‘adjusted income’ is not just salary. It also includes other payments an individual may receive during a year, including employer pension contributions. Find out more about adjusted income at the HMRC website.

While we are happy to see the government make these changes, it is a shame that they did not go one step further and remove the Tapered Annual Allowance altogether. By raising the limits on adjusted income, far fewer people will be impacted by this. However, the question needs to be asked: why bother keeping it at all?

Lifetime Allowance increase in line with inflation

The Lifetime Allowance for 2020/2021 has increased to £1,073,100.

This is in line with the announcement made in 2018 that, from 2018/19 onwards when the Lifetime Allowance was £1 million, the allowance would increase each year at the rate of increase in the CPI.

Get in touch

While the announcements made will only impact those with pension pots and earnings at the upper levels, it is still important to keep up to date with any changes made to pensions as and when they are announced. We’ll keep you fully informed with any developments in our monthly updates.

If you have any SIPP-related queries, or if you have any clients for whom SIPP advice would be beneficial, please get in touch. Email info@ipm-pensions.co.uk or call 01438 747 151.

Get in touch

Whether it’s a question about a specific client or SIPPs in general, we are here to help. Call us on 01438 747 151, email info@ipm-pensions.co.uk or complete the form below: