Woman looking at how the 2023 budget has changed women's pensions.

What changed with the State Pension for women

Spring Budget:  What do the Pension Changes mean for Women

At Women’s Wealth, we think pensions are beautiful. We big them up at every opportunity – there simply isn’t anything more tax effective.  You get tax relief on your pension contributions, and, on the way out you currently receive a 25% tax free lump with the remaining income taxed at your tax rate. Read on to learn how the latest budget pension changes for women could affect you.

Government pension reform and the pension gap for women

It’s a real positive seeing pension reform on the Government’s agenda as it means that pension pots potentially, can get bigger.  We just need to make sure that Women benefit from the changes.  The pension gap is perhaps one of the last areas of gender inequality in the UK.

Latest data from Aviva, has again found that the gender pension gap begins to widen significantly from the age of 35 years. And there are significant gaps in how much women pay into their pensions compared to men. 1

What pension reforms were introduced in the budget?

The Lifetime Allowance (LTA) has been removed – this is a limit that can be paid into your pension pot in order to receive tax relief.  Currently it stands at £1,073,000 but from April 2024 it has been abolished, allowing for unlimited pension funds.  It will only affect the top 1% of earners at present (although the number is growing).  It does appear it was introduced, at least in the short-term, to encourage highly skilled doctors to work longer.

The Annual Allowance (AA) has increased from £40,000 to £60,000, this is the maximum amount you can pay into your pension dependent on earnings and still benefit from tax relief.  The increase is long overdue as the AA hasn’t increased since 2014. Women who are self employed will particularly benefit from this increase.

Tax Free Cash has always been limited to 25% of the Lifetime Allowance but the link has now been severed.  From April 2024, the tax free cash will remain at £268,275 regardless of the size of the pension pot.  You may pay more tax on your pension income.  However, with effective financial planning the amount of tax paid could be reduced.

An increase in Money Purchase Annual Allowance (MPAA) from £4000 to £10,000 per year, means that if you have already taken your income flexibly from your pension and have triggered the MPAA, you could now add £10,000 per annum to your pension rather than £4000.  Out of all the changes, this is perhaps most significant for women.

I have a client who retired at 60 years old to look after her father, but now, three years later, she is finding that her pension income is insufficient and would like to go back to work.  Being able to contribute £10,000 per annum rather than £4000 to her pension is a big incentive for her to go back to work and increase the size of her pension.  This reform is a step in the right direction.  In closing the pension gap if it can attract women back to the workforce to make up for those lost years.

Positive changes for women’s pensions

These pension changes for women are positive. But let’s not forget that they have been introduced to encourage us to save more into our pension pots (think the carrot approach).  This is in anticipation that the state pension age may increase further.  There could be other changes on the horizon, particularly to do with accessing the tax free cash.  Now that the link has been broken with the Lifetime Allowance, will it disappear altogether?

We don’t know what the future holds and can only make decisions based upon what we know today.  However, we are still waiting on the details concerning these reforms. I would recommend that anyone making decisions regarding their pension speak to a professional.  

If you would like to hear about how Women’s Wealth could help you please use the link to book a call in my diary.

1 https://www.aviva.com/newsroom/news-releases/2023/03/pension-pots-of-women-just-over-half-the-size-of-men/

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