April 2023 Budget Pension Changes
The 2023 spring budget has created some exciting planning opportunities for pensions. Here Andrew Brown, Partner and Certified Financial Planner at Westcotts, explains more…
Chancellor Jeremy Hunt announced an ambitious package of measures this week, covering a series of changes to payments, taxes, and policies. One of the key areas to be affected is pensions. Mr Hunt’s first spring budget has significantly increased the scope for those who are able to make pension contributions.
The biggest change to occur and to be implemented from 6 April is the scrapping of the Lifetime Allowance (LTA) charge – the current cap on the value of pension assets that an individual can amass during their lifetime, tax-free.
For those with larger pensions, especially members of Defined Benefit schemes, the current £1,073,100 allowance has resulted in individual members’ initial scheme pensions being reduced, sometimes quite significantly.
While some individuals were able to benefit from protected LTA values, they will have been unable to make any further pension contributions as doing so would have resulted in them immediately losing any Fixed Protection.
Mr Hunt’s decision to scrap the Lifetime Allowance entirely means, in theory, that individuals will be free, from the 6th April 2023, to accrue as much as they wish within their pension (income and annual allowances allowing), without fear of an LTA charge being incurred in the future. As such, there are major opportunities for Inheritance Tax planning and efficient pension savings for those who may have otherwise previously breached the LTA cap.
There is a note of caution needed, however. If they win the next election, Labour have already pledged to reverse the changes to pensions, bar a possible concession for medical doctors. This makes planning more difficult of course and emphasises the need for those individuals who currently have some form of transitional protection (e.g., fixed protection) to take advice and to be extremely careful not to lose it!
Pension Commencement Lump-sums
While the limits on pension pot sizes will be removed, it should be noted that individuals who accrue pots above the current LTA of £1.0731M will not have access to the full 25% of tax-free pension commencement lump-sum (PCLS). Mr Hunt has stated that the maximum PCLS will remain at 25% of the current LTA. This is effectively a taper on the percentage of tax-free lump sum available from large pots.
Mr Hunt also announced that from 6 April the Annual Allowance will be increased from £40,000 to £60,000. The Annual Allowance is the maximum value of pension contributions that an individual can make and/or receive from their employer during the course of one tax-year, with tax relief, subject to the individual having sufficient relevant earnings.
It is possible for individuals who have made contributions to pensions previously to carry forward (use up) any unused Annual Allowances from up to the three previous tax-years, so in effect playing catch up. For next tax-year 2023-24 therefore individuals could contribute up to £180,000 potentially into pensions. The rules for carry forward are quite complicated however and professional advice is essential.
The amount an individual can contribute reduces for individuals whose pensionable income is below the Annual Allowance or who are no longer working, as well as for the highest earners and those who have already accessed income from their money purchase pension funds, excluding those in capped-drawdown, who have taken income within the GAD limits. Any individual below the age of 75 may make personal contributions each tax-year however of up to £3,600 and benefit from tax relief at source on these contributions.
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.
Money Purchase Annual Allowance and Tapered Annual Allowance
The final changes to pensions in the Budget were to the Money Purchase Annual Allowance and to the Tapered Annual Allowances (MPAA & TAA).
The MPPA restricts the Annual Allowance for those who have previously accessed taxable (defined contribution/money purchase) pension benefits to now £10,000 per tax-year (previously £4,000).
The TAA restricts the Annual Allowance for those who have income (broadly from all sources) in excess of £260,000 (previously £240,000), to a minimum of £10,000 (previously £4,000), with the individual losing £1 of their Annual Allowance, for every £2 of income above £260,000.
Why the change?
The main reason for this final change and indeed for the scrapping of the Lifetime Allowance is to ensure that in future most senior NHS staff avoid LTA and TAA charges. It should encourage very senior public service workers and industrialists to stay at work for longer, replacing otherwise lost income tax and NICs revenue for the government. It also provides an opportunity for individuals who have perhaps retired prematurely to return to the workforce.
Westcotts Chartered Financial Planners is a trading style of Westcotts Financial Management Ltd which is registered in England and Wales, Company No. 4342122. Westcotts Financial Management Ltd is authorised and regulated by the Financial Conduct Authority. The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.
If you would like to find out more about how the recent changes to pension rules will affect you, please complete the form below and we’ll call you back at a convenient time for you.