In the Spring Budget 2023, Jeremy Hunt simplified the pension tax regime and removed a major restriction which had limited pension saving and pension allowance for high earners.
Some of the key changes include:
- Abolition of the “Lifetime Allowance”
- Removal of the Lifetime Allowance Charge
- Increase in the Annual Allowance
- Increase in the Money Purchase Annual Allowance Limit
- Increase in the Limit for Those Subject to the Tapered Annual Allowance
- Tax Free Cash Sums
We summarise below our understanding of the principal changes announced. (These may be subject to further adjustment over the coming weeks and during the passage of the Finance Bill.)
Abolition of the “Lifetime Allowance”
The “Lifetime Allowance” on pension savings will be removed in a future Finance Bill with effect from April 2024.
Hitherto, individuals who have accumulated pension savings in excess of the Lifetime Allowance were subject to a tax charge (Lifetime Allowance Charge (‘LAC’)) at certain key events. Some individuals, however, were exempted from the full effects of this charge as a result of obtaining one of the seven forms of “Protection”.
Removal of the Lifetime Allowance Charge
With effect from 6th April 2023, the LAC is being abolished. No pension lifetime allowance charge will apply from 6 April 2023 on any event which would have triggered such a charge previously.
Increase in the Annual Allowance
Previously pension contributions have been limited to a maximum of £40,000 per annum for most people. With effect from 6th April 2023, this maximum will be increased to £60,000. Individuals who have not utilised fully previous annual allowances will continue to be able to carry these forward from the 3 previous years as before.
Increase in the Money Purchase Annual Allowance Limit
Where certain people are drawing pensions and yet still wish to contribute to their pension scheme, there was a further restriction on maximum contributions. The limit on such contributions was known as the Money Purchase Annual Allowance. With effect from 6th April 2023, this limit has been raised from £4,000 to £10,000.
Increase in the Limit for Those Subject to the Tapered Annual Allowance
The Annual Allowance is reduced using a tapering mechanism for those deemed “High Earners”. For those with total income – including company pension contributions – exceeding £312,000 per annum, the impact of this was to reduce the maximum pension contribution to £4,000 per annum.
In his Budget, Jeremy Hunt increased this to £10,000 for those High Earners who are impacted by the taper to the maximum extent.
The level at which the Tapered Annual Allowance can start to apply has also been increased from the current level of £240,000 per annum to £260,000 per annum with effect from 6th April 2023.
Tax Free Cash Sums
The maximum Pension Commencement Lump Sum (tax-free cash) has hitherto been set as one-quarter of funds available up to the Lifetime Allowance with exemptions for those with “Protection”.
We understand that with effect from 6th April 2023, the maximum tax-free lump sum will continue to be one-quarter of the funds accumulated but subject to a limit frozen at £268,275 – one-quarter of the current LTA.
For those who enjoy “Protection” under the 7 existing protection regimes, their ability to draw a higher tax-free cash appears unimpeded by the Budget.
What Does the 2023 Budget Mean For Your Pension?
The Budget simplifies the pension tax regime considerably. Some complexities and questions will remain.
We welcome the elimination of the Lifetime Allowance Charge and the increase in contributions limits from 6th April 2023. We also sympathise with those who have suffered the LAC previously. The resultant position appears that:
- As a result of these changes, there is no overall limit on pension saving.
- Maximum pension contributions will increase to £60,000 from 6 April 2023 for those to whom the standard allowance is available.
- Existing rights to draw tax free cash, which have been protected, are not affected.
- Some technical anomalies persist for the tax year 23-24 until the formal abolition of the Lifetime Allowance by 6 April 2024.
- The threat of a high exposure to the LAC on events that would occur after 6 April 2023 appears to have been eliminated.
- These changes will not apply retrospectively prior to 6 April 2023.
In our view – and of course, always subject to any further changes yet to be announced or incorporated in Finance Bill 2023 – the above removes many of the inhibiting factors to pension savings.
Overall the proposed changes are highly welcome.
What Should I Do For My Pension After the 2023 Budget?
We believe that clients need to consider the following action points with us and their tax advisors.
- For those accruing pension benefits, there is an opportunity to revisit contribution strategies to take advantage of the removal of the lifetime allowance and the increased contribution limit. Careful allowance will need to be taken of the new taper rules, which appear to remain complex.
- For clients contemplating drawing pension benefits, the strategy for and timing of withdrawals will need to be revisited to take account of the increased contribution opportunities whilst also considering any existing protections obtained.
- For clients who have already drawn benefits, the threat of the LAC at age 75 appears to be removed.
- For all clients, there is no need to adopt a restricted investment strategy. Henceforth, investments can be chosen for their merits without the worry of crossing limits.
We will be happy to explore all of this with you over the coming weeks. Please feel free to get in touch with our team to discuss these changes.