On Wednesday 15th March, Jeremy Hunt, the Chancellor of the Exchequer, addressed the Commons to deliver the Spring Budget 2023, with an aim to bring people back into the workforce. Mr Hunt commented that the Office for Budget Responsibility (OBR) expects inflation to fall from 10.7% to 2.9% by the end of 2023 and now forecasts the UK will not enter a technical recession this year. Nonetheless, living standards are still predicted to fall this year and next.

Read More:
Guide To 2023 Spring Budget Statement

The budget included some key changes to pension allowances. In advance of this week’s Finance Bill, the following addresses what we know, and what is yet to be confirmed:

1. Lifetime Allowance (LTA) will be abolished in April 2024
2. Annual Allowance (AA) will increase from £40,000 to £60,000 from April 2023
3. Money Purchase Annual Allowance (MPAA) will increase from £4,000 to £10,000 from April 2023 unless a higher amount is protected through one or more of the available protections
4. Maximum tax-free cash is frozen at £268,275 (25% of the current LTA)
5. Tapered annual allowance to be revised to start at £260,000 and allow £10,000 minimum tax-free pension contribution

What does this mean for you?

The above coupled with government-backed plans to increase the catchment group for automatic enrolment for pensions hints at a return to longer-term thinking on retirement policy.

Lifetime Allowance

• The current LTA of £1,073,100 will be abolished from 6th April 2024. In 2023/24, LTA checks still need to be done.
• As a result of the changes to the LTA, the maximum amount which can be taken as tax-free cash (TFC) will be frozen at £268,275 — 25% of the current standard LTA of £1,073,100 - with no suggestion of any future indexation.
  • Those with a protected right to higher TFC will continue to be able to access this right.
• From 6th April 2023, people who had stopped contributing because of being close to, or over the LTA, or who had a form of protection that stopped them paying in, will be able to recommence funding in accordance with the new rules.
  • Individuals who have already used 100% of their LTA will also be able to recommence funding, although it's unlikely that this will generate any rights to more TFC. We await the details.
• Anyone with enhanced or fixed protection who contributes before the end of the current tax year would risk losing their protection - which might include the TFC protection - and any LTA test triggered before 6th April 2023, could still incur a charge based on the current LTA.
  • Individuals with LTA issues who were considering taking benefits may wish to consider deferring until 6th April 2023, when the LTA charge will no longer apply.
  • Unfortunately, there will be cases where this can’t happen, such as reaching age 75 or on death before that age, which means that benefits will be tested in 2022/23 with the LTA tax charge in place.
• The abolition of the LTA may help to alleviate the situation where some workers feel they must leave their jobs to avoid triggering punitive tax charges.
• Savers in defined contribution pension schemes who might have been close to the LTA now have some assurance that they will not be penalised if they invest for growth.

Annual Allowance(s)

• People will be able to save more money into their pension which should incentivize them to remain in work longer helping employers who are attempting to retain talent in a challenging labour market.
• The extension of childcare support may allow a greater number of parents to return to work earlier and benefit from workplace pension savings, which may also help to reduce the pensions gender gap.
• Employees with ‘adjusted income’ of over £240,000 are currently subject to the tapered annual allowance. The taper currently reduces the annual allowance by £1 for every £2 of income between £240,000 and £312,000. This results in an annual allowance of £4,000 for people with an adjusted income of £312,000 or more.
  • The new annual allowance will start at £60,000, and the taper will start at £260,000. The annual allowance will taper to £10,000 when adjusted income is £360,000.
• Employers and employees should review any existing pay in lieu of pension arrangements that they have in place to maximise tax-advantaged savings.
• The decision to increase the MPAA to £10,000 will be welcomed by those seeking flexible retirement, those who have had to access pensions due to the cost-of-living crisis, as well as employers trying to retain workers with considerable experience in their field.
  • Many older workers have started to favour a gradual retirement, and this budget has acknowledged that withdrawing money from your pension shouldn’t prevent you from continuing to save towards full-time retirement.
  • Older workers are now more empowered to combine pension income with employment income while continuing to save for their future.
  • For those who have had to access pensions, due to the cost-of-living crisis, this increase offers the opportunity to replace withdrawn savings with less restriction

The budget has sparked a number of questions, some of which will remain unanswered until the Finance Bill is published on 23rd March.

What happens next?

The Finance Bill will include all the draft legislation relating to the changes applicable for the 2023/24 tax year. This will be debated in Parliament before becoming the Finance Act and receiving Royal Ascent. With only a few weeks of the current tax year remaining, the new legislation will not be fully enacted until well into the new tax year but will apply retrospectively from 6th April 2023.

In the meantime, HMRC will continue to give updates via their Pension schemes newsletters as information becomes available and, of course, we are available to help via your usual points of contact.

The attached guide provides further comment on other key announcements which we trust you will find helpful.

The purpose of this summary is to update you on the headline pension changes announced in the 2023 Spring Budget. It is for information purposes only. If you are unsure about any aspect of the information provided, you should seek advice from an independent financial adviser.

Read More:
Guide To 2023 Spring Budget Statement

Jason Marley
jmarley@kerrhenderson.com