On 15 March 2023, the Chancellor Jeremy Hunt made some major changes to pension allowances, and also announced measures to encourage more people back into work. Here’s how the changes could affect your employees and the workplace.
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
How have pension allowances changed?
Pension annual allowance changes
The pension annual allowance is the total amount someone can save into their pension plans each year before they have to pay an additional tax charge. This includes payments from the individual, their employer and any third party. It was either £40,000 or a person’s total earnings – whichever was lower. It’s going up to a maximum of £60,000 on 6 April 2023.
Money purchase annual allowance changes
If someone accesses any taxable money from their pension plan – either through a drawdown arrangement or from cashing in their pension savings – they may see their allowance reduce.
The amount someone can save into their plan will usually reduce from £40,000 to £4,000. This is known as the money purchase annual allowance.
The Chancellor announced that this will go up from £4,000 to £10,000 – making it easier for someone to keep working and saving once they’ve taken money from their savings, if they want to.
This might be particularly useful for anyone who dipped into their pension plan to help top up their income during the pandemic.
Tapered annual allowance changes
If someone is a higher earner they might have been affected by an allowance known as the tapered annual allowance. This gradually reduces the amount they can save into their pension plan each tax year, depending on their earnings. Their allowance wouldn’t reduce to any lower than £4,000. This lower limit will be increased to £10,000 in the new tax year.
Lifetime allowance changes
The lifetime allowance is the total amount someone can build up in all their pension savings in their lifetime without facing a tax charge when they come to take them. If their pension savings was worth more, they’d need to pay a tax charge on anything over the allowance – also known as the ‘excess’.
The lifetime allowance is currently £1,073,100 – and we were told in the 2021 Spring budget that it would stay there until 2026. But the Chancellor announced that the lifetime allowance will be removed completely, and no one will face a lifetime allowance tax charge from 6 April 2023.
It’s good news for someone if they were finding themselves close to or already affected by the previous allowance. It means they can give their pension savings a boost without worrying about paying any extra tax. Or, if they were planning to take their pension money soon but found they were over the previous allowance, they might now avoid up to 55% in tax charges.
For most people, however, the amount they can take as their tax-free entitlement will stay at 25% of the previous lifetime allowance limit of £1,073,100.
How might the Spring budget’s pension changes affect your employees?
The Chancellor’s pension changes have been chosen to make it more appealing for people to stay in work for longer, or to come out of retirement. This means they’ll mainly affect those who are in, or are close to, retirement.
So if someone wants to keep working and pay into their pension plan for longer, the changes will likely be welcome news. Someone might want to do this to aim for a more comfortable retirement, or because working makes it easier for them to keep up with rising costs.
The pension changes focus on allowing people to pay more into their plan. In practice, this means that people with higher salaries or bigger pension pots – who can afford to make the most of these new allowances – are more likely to benefit from the changes.
So if someone is still early on in their career, has no plans to access their pension savings soon or is currently a lower earner, they are unlikely to notice much difference in the short term.
How else might the Spring budget affect the workplace?
Hunt also introduced measures to encourage more economically inactive people – ie, those who are not in work and not looking for work – to return to work.
Apprenticeships for people aged over-50 – “returnerships” – will be offered to operate alongside skills boot camps and sector-based work academies.
The government will also increase the number of 50+ Universal Credit claimants who receive mid-life MOTs from 8,000 to 40,000 a year. So called mid-life MOTs looks at a person's “finances, skills and health, and enables them to better prepare for their retirement and build financial resilience”.
Jeremy Hunt allocated £400 million in funding to increase the availability of mental health and musculoskeletal resources for workers. He also said there will be a £3 million pilot to help people with special needs transition into the workplace.
If someone has questions about how any of the changes from the budget will affect them, they should speak to a financial advisor. A financial advisor will be able to tell them exactly what the changes mean for them, based on their personal circumstances. If someone doesn’t have a financial advisor, they can find one in their local area at unbiased.co.uk
Pensions plans are investments. They can go down as well as up in value and may be worth less than what was paid in.
Tax rules and legislation may change and someone’s individual circumstances and where they live in the UK will affect the tax they pay.
The information here is based on our understanding in March 2023 and should not be taken as financial advice. If you’re unsure please speak to a financial advisor.