Good news for your people – Spring Budget 2023

Note: whether your primary responsibility is to your LGPS fund or to your local government employer, this overview considers the recent pensions tax changes for your members or employees respectively.

In the recent Budget, Jeremy Hunt announced that the Lifetime Allowance (LTA) will be abolished entirely and the Annual Allowance (AA) will be increased from £40,000 to £60,000 from 1 April 2023. For the purposes of AA calculations, closed legacy public sector pension schemes, including the Local Government Pension Scheme, will now be linked with open schemes, allowing members to offset any negative growth in their legacy scheme against the AA threshold. You can read more about all of the pensions tax changes announced in the Budget here.

What does this mean?

This is good news for your people, and not just for the very highest earners. Due to the reducing LTA and the freeze on the AA, combined with the generous nature of LGPS benefit accrual, even middle leaders may have started to feel the impact of pensions tax. These changes create a positive engagement opportunity.

The express purpose of these changes is to help the NHS retain doctors, but we also suspect a wider political motive to ease pressure on public sector pay negotiations. The knock-on effect is that thousands of very well-off private sector individuals will benefit so it feels like a short-term fix. The fact that Labour are saying they will reverse the LTA abolition adds to the uncertainty and may lead some to retire sooner to ‘lock-in’ their positive tax position.

There are also some more detailed issues to consider:

• Pensions Savings Statements (PSS) for the last tax year – Anyone receiving a PSS for the 2022/23 tax year (tax return deadline 31 January 2024) is still subject to an AA of £40,000.
• Limits on maximum tax-free cash – Although the LTA has been removed, tax-free cash will be restricted to 25% of the current LTA (£268,275), which limits the tax relief on pension savings above the current LTA, with no future adjustment for inflation.

What action should you be taking?

There are a few actions we are suggesting taking to help make the most of the good news, whilst also addressing some of the complications resulting from the change, including:  

• Review existing policies and processes, such as employer salary supplement policies and scheme retirement processes, to ensure these continue to be effective;
• Engage directly with your members or employees to explain the changes and support them to access the right guidance. These changes come at a difficult time for members with the McCloud changes happening at the same time; and
• Undertake workforce analysis to understand who might be affected and how these changes might positively impact retention and overall workforce capacity. Will there be a retirement to the retirement door before the next election?

Our specialist public service pensions team is able to support on all of the above. For example, we have a team of financial coaches who are able to deliver group or one-to-one guidance sessions to help individuals through the changes and answer any questions.

If you would like to discuss this further please get in touch with Steve via the contacts below.