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Tim Fassam, Director of Public Affairs, discusses the Chancellor's Spring Budget announcements – including the big changes to pension allowances. Find out more about the changes that could really matter to your clients in our short video and recap below.
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Recently, Jeremy Hunt set out his recovery plan for the UK economy and vision to control rising inflation.
The key focus of his announcement was economic growth, much of which centred on his plan to get early retirees back into the workforce, resulting in some major changes to pension allowances. Here, we summarise these changes and other key points from the Budget which might impact your clients, and the advice opportunities these may bring for you.
Key pension changes from the 2023 Spring Budget:
- The pension annual allowance will increase from £40,000 to £60,000
- The money purchase annual allowance will increase from £4,000 to £10,000
- The tapered annual allowance will be updated
- The lifetime allowance will be removed entirely
Changes to pension allowances
Annual allowance
An increase to the annual allowance was widely expected and we were encouraged to see this rise by 50% to £60,000, representing the first increase in pension annual allowance in many years. Carry forward rules remain unchanged, enabling the use of any unused annual allowance from the previous three tax years.
Money purchase annual allowance
The pensions industry has been encouraging changes to the MPAA limit for some time, which can be seen as an impediment for retirees to consider returning to employment. The MPAA, the maximum amount, once triggered, that can be saved into a money purchase pension plan without incurring a tax charge, has more than doubled, back to its original limit of £10,000. This could make it easier for clients who are already accessing their pension benefits to return to work, or continue working for longer, whilst continuing to save into their pension plan.
This might be particularly useful for your clients who may have accessed their pension plan to help top up their income during the pandemic or while costs are so high.
Tapered annual allowance changes
The TPAA impacts those on higher incomes, gradually reducing the amount that can be saved into a pension plan each tax year without incurring a tax charge, depending on their earnings:
- Threshold income – £200,000
- Adjusted income – £260,000 (up from £240,000)
This lower limit will be increased from £4,000 to £10,000 in the new tax year.
Lifetime allowance changes
Changes were expected to the LTA, the total amount that can be saved into an individual’s pension plan(s) before incurring a tax charge on the excess above the limit.
That the Chancellor has announced its complete removal was something of a surprise given we were told in the Spring Budget of 2021 that the current lifetime allowance of £1,073,100 would remain until 2026.
This will be good news for your clients who find themselves close to, or already impacted by, the previous allowance, and may encourage further pension savings now that the worry of an additional tax charge, which may have been up to 55% on the previous limit, has been removed.
The lifetime allowance also affected other lump sum payments, where LTA availability was necessary to authorise the following: pension commencement lump sum, serious ill-health lump sum, uncrystallised funds pension lump sum and winding up lump sum.
The following benefits which currently incur a 55% tax charge on excesses above the lifetime allowance will instead be subject to income tax on the excess at an individual’s marginal rate:
- Lifetime allowance excess lump sum
- Uncrystallised funds lump sum death benefit
- Defined benefits lump sum death benefit
- Serious ill-health lump sum
Pension commencement lump sum (Tax-free cash)
Important to note, despite the removal of the LTA, that the Chancellor has effectively applied a freeze to the amount of tax-free cash an individual will be able to access. The maximum sum (for those without any protections) remains at 25% of the fund, but only up to a maximum of £268,275, which is 25% of the current lifetime allowance of £1,073,100 and will be frozen thereafter.
For those who had protection in place at the date of the Budget, the maximum tax-free cash will continue to be calculated in line with the rules for the form of protection that applies.
How can I help my clients following the Spring Budget’s pension changes?
The Chancellor’s pension changes have been carefully chosen to make it more appealing for people to stay in work longer, or to come out of retirement, and allow individuals to pay more into their plan(s).
The impact will mainly be on those who are in, or are close to, retirement, but it also gives scope for those nearer the start of their pension savings journey to review their intentions, with the removal of the LTA. This can present an opportunity to revisit existing pension planning with your clients, particularly higher earners looking to reassess how they are saving for retirement, who may wish to capitalise on the changes to allowances and may stay in work longer or contribute more to their plan(s).
How your clients are looking to access their pension savings, and the timetable to do so, may also now be different, giving you the chance to add value with advice to make the most of opportunities the Budget has created.
The effective freeze on pension commencement lump sum may also give rise to other, broader savings opportunities for your clients seeking to save in the most tax-efficient way.
How can my clients make the most of the new pension allowances?
If you’d like to review the pension payments or consider making a top-up to your client’s Standard Life pension plan, you can do this by using our online services.
Further information
HM Treasury – Spring Budget 2023
HM Treasury – Disability White Paper factsheet
HMRC – Overview of tax legislation and rates (OOTLAR)
HMRC – Policy paper – Pension Tax Limits
Income tax rates & allowances (exc Scotland)
Income tax rates & allowances (Scotland)
If you would like to discuss the changes and potential planning opportunities with clients, please get in touch with your usual Standard Life contact. Alternatively, you can call 0345 607 0216 or email us at sl_distribution@standardlife.com. Call charges will vary.
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