A number of changes to the tax position for pensions were announced as part of the 2023 Spring Budget. These changes are summarised below. You can also find more detailed information in the pensions tax factsheets contained on this page. If you have any questions about how your pension may be impacted by the changes, please contact the Pensions Department in the first instance.
The text below provides a brief summary of the tax rules in force after 6 April 2023.
Pension tax allowances
Pension tax allowances are limits on how much you can:-
- pay into a pension over a year, running from each 6 April to 5 April, in line with the tax year (Annual Allowance and Money Purchase Annual Allowance)
- build up in a pension over the course of your working life (Lifetime Allowance).
If you go over these limits, you may have to pay a tax charge equivalent to your marginal rate of income tax. The pension tax allowances are unlikely to affect the majority of our members.
A more detailed summary of the pension tax allowances can be found in the Pension Tax Limits: Summary Factsheet.
The Annual Allowance (AA)
This is the total amount that can be paid into all of your pensions each year without you having to pay extra tax. For most people, the Annual Allowance is £60,000 but it might be lower if you’re a high earner.
If you build up pension savings in a defined contribution (DC) scheme such as Pace DC, your Annual Allowance is based on how much money you and the Co-op put into your pension. If you have benefits in a defined benefit (DB) scheme, your Annual Allowance is based on how much your DB pension increases in value over the year.
You’ll start to pay income tax at your marginal rate on any pension savings you make which are more than the Annual Allowance.
If you joined Pace DC before 10 June 2019, see the Annual Allowance Factsheet here for more detailed information about the Annual Allowance.
If you joined Pace DC on or after 10 June 2019, see the Annual Allowance Factsheet here for more detailed information about the Annual Allowance.
The Money Purchase Annual Allowance (MPAA)
If you’ve already started taking money from a DC pension you can now save up to £10,000 a year into another DC scheme without paying extra tax. Once you reach £10,000 you’ll start paying income tax at your marginal rate on the money you save.
This is relevant for you if you’re already using some of your pension savings and continuing to work and save into a different pension at the same time. Your pension scheme administrator will let you know if you’ve triggered the MPAA.
See the Annual Allowance Factsheets above for more detailed information on the MPAA.
The Lifetime Allowance (LTA)
The limit on how much can go into your pension over your lifetime is known as the Lifetime Allowance.
The Government removed the Lifetime Allowance tax charge from 6 April 2023. This was a one-off tax charge of 55% where pension savings above the Lifetime Allowance were taken as a lump sum, or 25% plus income tax where they were taken as a pension.
The government is planning to abolish the Lifetime Allowance from April 2024. We’re still waiting for details on how this will be implemented and will update this page and the pensions tax factsheets once further information becomes available as we know many colleagues will be planning to take their pension savings after 6 April 2024.
The Lifetime Allowance is still in place for the 2023/2024 tax year, and is currently £1,073,100.
If you take any of your pension savings this tax year and the total value of your pension savings is above the Lifetime Allowance at that time, you’ll pay income tax on the excess at your marginal rate instead of the Lifetime Allowance tax charge. This means all of your pension savings, apart from any tax-free cash, will now be taxed as earned income under PAYE, including any pension savings above the Lifetime Allowance. There will be no additional Lifetime Allowance tax charge.
It’s important to note that any lump sum benefits which are paid from a pension scheme following death in service (when a colleague dies whilst still working for the Co-op) are also tested against the Lifetime Allowance. Benefits which could be paid in this situation include:
- The value of your Pace DC account (including the contributions paid by the Co-op and any Additional Voluntary Contributions that you have paid)
- Your death in service lump sum. The amount of this will depend on your contribution rate at the time of your death but could be as high as 3 times your salary if you joined Pace DC before 10 June 2019
- If you were an active member of Pace DB on 28 October 2015 and switched immediately to Pace DC, you may qualify for an additional 3 x Salary life cover. Further information can be found in the Pace DB pensions guide
- Any other benefits which are paid from other registered pension schemes outside of Co-op, i.e. if you have transferred your Pace DB benefits to another pension scheme, the current value of this will also be included in your total
You’re more likely to exceed the Lifetime Allowance on your death before retirement if your earnings are high and you have substantial pension savings. However, it’s important to remember that the Lifetime Allowance is expected to be abolished on 6 April 2024.
You can find more information about the Lifetime Allowance in the Lifetime Allowance Factsheet.
Tax free cash
When you retire you can take up to 25% of your pension as tax-free cash. There is now a maximum amount that you can take as tax-free cash, which is £268,275. Any cash you take from your pension after that will be taxed at your marginal rate of income tax. If the value of all of your pensions combined is worth more than £1,073,100, this might affect you. The maximum amount of tax-free cash you can take at retirement is expected to remain frozen at £268,275 and this limit would apply to you if you take your benefits in a future tax year.
Further information about the limit on tax-free cash can be found in the Lifetime Allowance Factsheet and the Tax Summary Factsheet.
If you have a protected right to a higher tax-free lump sum as at 5 April 2023, or if you successfully apply for such a protected right, you’ll still be able to access this right. The Pensions Protections Factsheet provides more information about tax-free lump sums and protected rights. You must apply for the pension protections before you take any benefits.
Pension taxation is complicated. If you think you may be affected by the tax limits, you should consider getting independent financial advice. You can find an adviser in your area who is regulated by the Financial Conduct Authority by searching for “Find a retirement adviser” on the MoneyHelper website: www.moneyhelper.org.uk. You should check the specialist advice areas of any adviser, as well as the cost of their advice, before appointing them.