Following the 2023 Spring Budget we take a look at some the key questions that have arisen about pensions. We explain what changes were announced by the Chancellor, how they will impact on pension savings and the main issues that you should be aware of.
Contents
- What pension changes were announced in the Chancellor’s Spring Budget on 15 March 2023?
- Why has the Chancellor announced these changes in the Spring Budget?
- Who is most likely to be affected by these changes?
- What is the operative date of all these changes?
- What do you need to be aware of, as a result of the Spring Budget 2023?
What pension changes were announced in the Chancellor’s Spring Budget on 15 March 2023?
(a) Annual Allowance
From 6 April 2023, the Annual Allowance for tax relief on pension contributions into a registered pension scheme will increase from £40,000 to £60,000 gross.
For those potentially affected by the Tapered Annual Allowance, the ‘adjusted income limit’ will increase from £240,000 to £260,000 from 6 April 2023.
This means that where an individual’s adjusted income is over £260,000, their Annual Allowance in the tax year may be reduced.
For every £2 their adjusted income goes over £260,000, their Annual Allowance for the tax year will reduce by £1.
The minimum reduced (or tapered) Annual Allowance a member can have, for the 2023/24 tax year onwards, is £10,000. This is being increased from £4,000.
For the 2023/24 tax year onwards, the Money Purchase Annual Allowance limit will also increase from £4,000 to £10,000.
(b) Lifetime Allowance
The Chancellor announced that, from 6 April 2023, the Lifetime Allowance charge would be removed.
The Lifetime Allowance will be fully abolished from the 2024/25 tax year onwards, through a future Finance Bill.
The Lifetime Allowance framework will therefore remain in place for the 2023/24 tax year, and only the Lifetime Allowance charge will be removed at this stage.
As a pension scheme administrator, we will therefore need to carry on with Lifetime Allowance checks when paying benefits, (for example, assessing whether you have available Lifetime Allowance), and to issue benefit crystallisation event statements.
(c) Pension Commencement Lump Sum (sometimes referred to as ‘tax-free lump sum’)
Because of the changes to the Lifetime Allowance, the maximum amount that an individual can take as a Pension Commencement Lump Sum (PCLS) from 6 April 2023 will be frozen at £268,275.
This amount is 25% of the current standard Lifetime Allowance of £1,073,100.
However, those with a protected right to a higher PCLS will continue to be able to access this right.
Additionally, individuals who hold Enhanced Protection, or one of the three types of Fixed Protection will, from 6 April 2023, be able to make new contributions, accrue new pension benefits, join new pension arrangements, or transfer - without losing their protection.
This is provided that the protection was applied for before 15 March 2023, and a certificate or reference number subsequently issued.
Eligible individuals will also keep their entitlement to a higher PCLS.
(d) Other pension lump sums
Where the following lump sum payments would currently be subject to a Lifetime Allowance excess tax charge at 55%, from 6 April 2023 the excess amount will be taxed at the individual’s marginal rate:
- Serious Ill-Health Lump Sum
- Uncrystallised Funds Lump Sum Death Benefit
- Defined Benefits Lump Sum Death Benefit
- Lifetime Allowance Excess Lump Sum
Why has the Chancellor announced these changes in the Spring Budget?
These changes support the government’s efforts to encourage inactive individuals to return to work; in particular, those aged 50 and above, as well as removing incentives to either reduce working hours, or leave the labour market entirely, because of pension tax limits.
Evidence suggests that recent increases in inactivity have been driven primarily by those aged 50-64, and voluntary early retirement has been a primary reason for these individuals to leave the labour market, although alternative evidence suggests that long-term sickness is another reason for inactivity.
If fully enacted by legislation, these changes support individuals’ ability to build up retirement savings and improve the financial incentive of work, whilst continuing to balance the cost of pensions tax relief.
Who is most likely to be affected by these changes?
(a) Individual members of registered pension schemes who make annual pension contributions over the Annual Allowance (AA), Money Purchase Annual Allowance (MPAA), or Tapered Annual Allowance (TAA), and who would therefore expect to become subject to an AA excess tax charge.
(b) Individual members of registered pension schemes who already have or expect to have pension savings exceeding either the standard Lifetime Allowance (LTA) or their protected LTA, and who would therefore expect to become subject to an LTA excess tax charge.
(c) Scheme administrators of registered pension schemes will also need to modify their processes to accommodate changes to the AA and LTA.
What is the operative date of all these changes?
The increases to the AA, MPAA, and TAA will take effect on and after 6 April 2023.
The measures to ensure that no-one will face an LTA excess tax charge will take effect on and after 6 April 2023.
The frozen maximum limit on the PCLS will take effect on and after 6 April 2023.
The change in the taxation of the other pension lump sums (see above) will take effect on and after 6 April 2023.
What do you need to be aware of, as a result of the Spring Budget 2023?
(a) Are you currently accessing benefits from your SIPP or SSAS (which is known as a ‘Benefit Crystallisation Event’ or BCE)? If so, and you are close to - or above – your LTA, you may wish to consider:
(i) changing the date of your BCE until after 5 April 2023, because from that point, any excess over your LTA need not be subject to tax. Please note though that the LTA will still be tested during the 2023/24 tax year, and if the excess over the LTA is taken as a lump sum, then it is taxed at your marginal rate of Income Tax. Or,
(ii) changing the fund amount being accessed (or ‘crystallised’), so that it is less than your LTA.
(b) If you attain age 75 during the 2023/24 tax year, we will still need to carry out an ‘age 75 test’, as the actual LTA is not being abolished until 6 April 2024. However, the government has said that any excess funds over the LTA in the 2023/24 tax year will not be taxed, and at age 75, there is no option to take the excess over your LTA as a lump sum.
(c) Do you hold Enhanced Protection or one of the three types of Fixed Protection? If so, and even accounting for the information outlined in section 1(c) above, we would strongly suggest not making a contribution into your SIPP or SSAS, or any other action that would usually cause it to be lost, until the Spring Finance Bill that was issued on 23 March 2023 has received Royal Assent and become the Finance Act 2023, (which we anticipate will happen prior to the Parliamentary Summer Recess in July 2023). The contents of a Bill can be amended at any time leading up to Royal Assent, and so it would be ‘safer’ to contribute into your pension arrangement without losing your protection, once it is confirmed in law that you can.
NB: For those with Enhanced Protection and pension funds that are yet to be crystallised, our blog, Finance Bill would cap pension lump sum protection, outlines an important development to the calculation of your Pension Commencement Lump Sum at the date of crystallisation.
(d) Do you hold Individual Protection 2014 or Individual Protection 2016? If so, these are not discussed in the Budget papers that have been issued to date. We will let you know if the legislation provides any details.
(e) Where a SIPP or SSAS member has passed away, and their pension benefits have not yet been designated but there is a possible LTA excess, you may wish us to defer making a designation until after 5 April 2023 - if that is not more than two years since first notifying us of the death, where the member was aged under 75. This is because the effective date of either a lump sum death benefit BCE, or a BCE on designation for a dependant/nominee pension, is the date of designation or payment and not the date of the member’s death.
(f) If you have already paid, or become liable to pay, an LTA excess charge prior to the Spring Budget, it will not be possible to either recover the payment, or to not pay the LTA excess tax charge. Unfortunately, the proposed abolition of the LTA was not a change that was flagged in advance. News reports released in the days prior to the Spring Budget suggested an increase in the LTA to a higher figure than at present.
(g) Are you currently subject to the Money Purchase Annual Allowance? If you are, and are actively contributing to your SIPP or SSAS, the incoming increase in the MPAA to £10,000 from 6 April 2023, could be of help to you.
(h) Are you currently subject to a ‘tapered’ Annual Allowance? If so, you may wish to check with your Accountant about any impact on you, resulting from the adjusted income figure for tapering increasing to £260,000 with effect from 6 April 2023, and the minimum tapered Annual Allowance being increased to £10,000 from that date, as opposed to £4,000 at present.
(i) Finally, what shouldn’t you immediately do, following the Spring Budget?
NB 1: Where you hold either Enhanced Protection or one of the three types of Fixed Protection, don’t pay a contribution into your SIPP and SSAS before 6 April 2023; and
NB 2: Where you hold any form of Lifetime Allowance protection, don’t throw away your protection certificates, reference numbers, or written evidence of any ‘scheme-specific tax-free cash protection’. Please keep these in a safe place for the time being - just in case the abolition of the Lifetime Allowance does not actually happen.
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