The pensions industry has begun poring over the fine print of the 2023 Spring Budget after the Chancellor announced changes to a range of pension-related provisions as part of the government’s plan to encourage older and high skilled people to go back into work or remain longer in the workforce.

In his statement, Jeremy Hunt said the annual allowance – which is the limit on the tax relief for pensions savings in any one tax year – would rise to £60,000 from £40,000 and it appears that individuals will continue to be able to carry forward unused annual allowances from the previous three tax years.

He revealed that the lifetime allowance (LTA) which is the maximum amount of pension savings an individual could accumulate over their working life without having to pay additional tax – currently set at £1.07 million – would be removed from all legislation with effect from 6 April 2024. However, for those lucky enough to have pension benefits exceeding the LTA already, the benefit of reduced taxation will apply from the start of the new tax year (6 April 2023), when the effective rate of tax on excess benefits will be reduced from 55% to each individual’s marginal rate of income tax.

Other key changes include increasing both the money purchase annual allowance and the tapered annual allowance from £4,000 to £10,000 from 6 April 2023, while the adjusted income threshold for the tapered annual allowance would also be increased from £240,000 to £260,000, again from 6 April 2023.

The maximum pension commencement lump sum on retirement would, however, be frozen at its current level of £268,275 (25% of the LTA), except for those who already hold protection at a higher amount and would have the option of higher lumps sums, as these protections are intended to remain in place.

Budget reaction

The announcement received some approval from within the industry with the Pensions and Lifetime Savings Association saying tax relief was needed to encourage behaviours which would help more people achieve an adequate income in retirement, and the changes would also allow additional scope for savers to contribute lump sums into their pension to meet any shortfalls before they retire.

The independent Institute for Fiscal Studies was, however, less enthusiastic for the changes, suggesting that poorly designed pensions tax allowances had been increased or scrapped in an effort to encourage a relatively small number of better-off workers to stay in the workforce a bit longer and the changes were unlikely to have a big effect on overall employment.

MHM’s opinion

On balance, we think the removal of the LTA is a sensible decision and the interim step of removing the 55% fixed rate of tax on excess benefits allows this to apply almost immediately, while the extra 12 months will be used to unravel the complicated rules around the LTA, which have evolved significantly since 2006.

There seems little need to maintain both an annual allowance for tax relief and a lifetime cap on tax-privileged retirement benefits. It is interesting to recall that, when first launched in 2006, this was widely referred to as “pension tax simplification” but, so far, has turned out to be anything but simple!

Finally, while there may be some objection to the idea of the government favouring the wealthiest in society by increasing the annual allowance to £60,000, we should remember that, when introduced in 2006 by Tony Blair’s Labour government, and with Gordon Brown as Chancellor, the annual allowance was initially set at £215,000 and rose to £255,000 in 2010 before gradually being reduced to its current level of “only” £40,000.

For further information about how the Budget may affect you or your company’s pension arrangements, contact David Hodgson on 01423 229029 or by email to david.hodgson@sandccarsalesharrogate.co.uk

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