The Chancellor’s Spring Budget has brought about significant changes for pension savers. In his announcement today, Jeremy Hunt confirmed the Lifetime Allowance will be abolished in a bid to boost economic growth by enticing the over 50s back into work and trying to incentivise NHS doctors and consultants from reducing hours or retiring early because of the way pension taxation currently works.
The Annual Allowance, Money Purchase Annual Allowance, and Tapered Annual Allowance for pension contributions will all increase as well.
Pension Lifetime Allowance Abolished
The Lifetime Allowance (LTA) is the total amount that workers can accumulate in their pensions before paying a tax charge. The LTA, currently £1,073,100, was frozen at this level in April 2020 and was expected to remain frozen for 5 years. However, today, the Chancellor has announced the abolition of the LTA. From 6 April 2023 the LTA tax charge will be removed, before fully abolishing it in a future Finance Bill. A caveat to this however is the maximum pension commencement lump sum (tax-free cash) for those without LTA protections will be retained at its current level of £268,275 and will be frozen thereafter. It is currently unclear how people with LTA protections in place will be affected.
The abolition is a significant change for pension savers and will have a positive effect on many of our clients, who will now have the opportunity to save greater amounts towards their retirement.
As pensions are not usually included as estate assets for Inheritance Tax (IHT) purposes, the LTA abolishment will also bring with it a potential Inheritance Tax planning opportunity, allowing applicable families to place more funds into pensions and therefore shield more assets from Inheritance Tax.
Pension Annual Allowance Increased
The pension annual allowance is the annual limit on the amount of contributions paid to, or benefits accrued in, a pension scheme before the member suffers a tax charge. Today, it was announced that the annual allowance will increase from £40,000 to £60,000 from 6 April 2023 – again a significant increase on the current level that has been static since 2014. This will have a positive impact on higher and additional rate taxpayers whose earnings provide the ability to pay larger amounts into pensions – either on a regular basis or via lump sums.
Pension savers can continue to carry forward unused annual allowances from the previous three tax years, once the current tax year has been fully utilised.
Tapered Annual Allowance Increased
The Tapered Annual Allowance (TAA) is much lower than the standard annual allowance and may apply to any pension member with ‘threshold’ income exceeding £200,000 and ‘adjusted income’ of over £240,000.
Announced today, the TAA will increase from £4,000 to £10,000 from 6 April 2023. The accompanying ‘threshold’ income will remain at £200,000, but the ‘adjusted’ income of over £240,000 will increase to £260,000, from 6 April 2023.
Money Purchase Annual Allowance Increased
The Money Purchase Annual Allowance (MPAA) prevents individuals from paying in pension contributions over the MPAA threshold, where pension flexibility has already been accessed. The MPAA will increase from £4,000 to £10,000 from 6 April 2023.
Many of the measures announced in the Chancellor’s Budget will give people the opportunity to build greater retirement security whilst remaining economically active for longer and these pension changes will clearly impact the way our clients can plan and save.
As the changes will only apply from the start of the new tax year (6 April 2023), there is no immediate action to be taken.
We eagerly await the completion of the new Finance Bill and we will be discussing the current changes and planning opportunities with clients in due course and as part of our annual review offering.