UK Spring Budget 2023: Pension update
Earlier today, UK Chancellor of the Exchequer Jeremy Hunt delivered his Spring Budget.
In the run up to the budget the expectation was that there would be a focus on measures to support the Government’s economic plan to halve inflation, grow the economy and reduce public debt.
Rumours were also swirling of upcoming changes to pension legislation with the expectation being that this could be the most significant budget for pensions since pension freedoms were announced in 2014.
It’s safe to say this budget didn’t disappoint in that regard with the Chancellor taking a sledgehammer to the pension allowances, which will have far reaching implications for High Earners.
Below I explain the proposals in detail and what they mean for your employees. Some of the details are yet to be confirmed and will hopefully become clearer in the coming days.
Annual Allowance (AA)
The Annual Allowance which limits the amount that can be paid into pension in any tax year, this covers both Employer and Employee contributions, is set to rise by 50% – up from the current rate of £40,000 to £60,000 from April 2023.
This is a significant increase to the AA, which will particularly help those in defined benefit (DB) schemes with long service who see their earnings rise.
As the Chancellor stated, this policy was designed to encourage public sector employees to remain in work, specifically in the NHS, so it will be interesting to see if this is effective.
Regardless of the aim, this change will see many higher paid workers benefit from this boost to the allowance.
Tapered Annual Allowance (TAA)
Changes have also been announced to the TAA, with the starting point for tapering from April 2023 to be £260,000 (up from £240,000) and the minimum allowance to now taper down to £10,000 rather than £4,000. Detail on whether the way in which the tapering works is changing is yet to be confirmed.
Whilst we may have preferred to see the chancellor abolish the TAA, this will mean that those with the highest earnings can save slightly more into their pension.
Money Purchase Annual Allowance (MPAA)
The MPAA, which comes into effect once you start to draw a retirement income, will increase in April 2023 from £4,000 to £10,000 per annum.
This will be a direct benefit for the many people who have had to dip into their pension, due to the cost-of-living crisis, whilst still working. This hopefully means they will be able to benefit from their full employer pension contribution without fear of a tax charge.
So, while this seems the smallest of the changes, it is likely to be the one that benefits the most people, so we certainly welcome this change, and it is one that the pension industry as a whole has been lobbying for.
Lifetime Allowance (LTA)
The biggest change and one that I think took everyone by surprise was the abolition of the LTA. Since its highest point of £1.8m in 2011/12 it had been falling and currently sat at £1,073,100.
The expectation was that this would increase back up to the previous high level, but instead the chancellor abolished the LTA in its entirety.
The aim is to encourage many workers over 50 back into employment and incentivise individuals, especially doctors, to remain in the workforce.
However, there is a catch in that the amount of tax-free cash that you can take will, for most people, be limited to 25% of the current LTA, so £268,275, rather than 25% of the full value of the fund. Exceptions are expected for those with suitable protections on funds currently in excess of the LTA.
So, whilst the harsh 55% LTA tax has been removed, benefits above the tax-free cash level will be entirely subject to income tax. This does though open up the ability to use pensions to pass on unlimited amounts of wealth, tax efficiently, to the next generation.
Each of these changes on their own would have seen many people impacted for the better when it comes to pension saving, but all together they represent a seismic shift in pension tax policy and many people will now be looking for how they can maximise the benefits of these changes.
These changes are likely to see a review of the benefits employers have offered to high earners or those previously impacted by the Lifetime Allowance, who could not contribute to the schemes on offer.