Budget (15th March) - pensions measures
With the Chancellor staying silent on the thornier issues around pensions tax in last year’s Autumn Statement pressure has been mounting to encourage over 55’s to stay in work or return to the workplace. With today’s changes, he did not disappoint in making changes this time, but has he done enough?
The current system has been unfair.
Applying tax relief limits to both pension contributions and withdrawals has proved overly complex and unfair. By abolishing the Lifetime Allowance and increasing the Annual Allowance, this Budget has given some pensions savers an undeniable boost and will incentivise the use of pensions as a savings vehicle. It will also have the effect of retaining within employment, some of the most important talent we have in the UK.
Abolishing the Lifetime Allowance is a significant simplification that will be welcomed by both savers and the pensions industry. However the retention of the various Annual Allowance tapers, albeit at a higher level, will reduce the level of tax paid by savers but still retains the underlying complexity. Balancing the opportunities and risks will result in a greater need for advice and support from employers as savers grapple with how to get the best outcomes and maximise savings in the new system.
Employers will also need to consider how the changes could impact both employee behaviour and their benefit offerings, for example around dealing with re-enrolment requests and reviewing life insurance arrangements.
Is the Chancellor’s work here done in terms of reaching his goals?
The Chancellor highlighted the importance of older generations and the need for their skills at work. With regard his goal of encouraging people to stay in or go back to work, it is good news for higher earners and those who were not thinking of retiring anytime soon. Yet whilst recent retirees may be left feeling like they have missed out, they may not want to give up the flexibility and lifestyle they have in retirement to go back to work.
There was some speculation that the Chancellor would look outside of taxes and increase the State Pension Age ahead of 2044. If the tax changes don’t have the desired effect, this could remain on the agenda for Budgets to come. What is certain is that for many there is a golden opportunity right now.
Summary of the Budget (15th March)
Although the exact detail will be set out in the Finance Bill, we have set out a summary of the changes below:
From April 2023:
- the AA will increase from £40,000 to £60,000
- the Money Purchase Annual Allowance will increase from £4,000 to £10,000
- the adjusted income threshold for the Tapered Annual Allowance will increase from £240,000 to £260,000 from 6 April 2023; the minimum Tapered Annual Allowance increases from £4,000 to £10,000
- The LTA charge will be abolished from April 2023
- The LTA itself will be abolished from April 2024
- Certain lump sum benefits are currently tax-free up to the LTA but are taxed at 55% on any amount taken above the LTA. That excess will in future be taxed at the individual’s marginal rate of income tax.
- All this appears to imply some interim transitional measures but detail is currently scant; the provisions will be in the Finance Bill.
Pension Commencement Lump Sum
- The maximum PCLS will be frozen at 25% of current standard LTA (i.e. £268,275) or member’s protected LTA, where applicable.
- The government proposes to encourage the creation of new vehicles for investment into science and tech companies, tailored to the needs of DC schemes, through a new Long-term Investment for Technology and Science (LIFTS) initiative. It is seeking feedback on the design of the competition that will be used to develop this.
- Open and closed public service pension schemes for a given workforce will be treated as linked for the purposes of calculating AA charges, so allowing members to offset any negative real growth in legacy public service pension schemes against the Annual Allowance. This will be implemented through secondary legislation and will apply from April 2023.
- LGPS: The government is seeking to accelerate transfer of the £364 billion LGPS assets into pools to support increased investment in innovative companies and other productive assets. It will shortly consult on this.
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