Budget 2023 – major changes to the pension lifetime allowance and the pension annual allowance
Here, we outline the key changes for pension savers
Although prior to the Budget statement, many of the changes to pension legislation were leaked, it was certainly a shock when Chancellor Jeremy Hunt today announced the abolition of the lifetime allowance for pension savers. As expected, he also announced a raft of changes to pension annual allowances and the amount of tax-relieved funding that can be made each tax year.
What changes were announced?
- The annual allowance will increase from £40,000 to £60,000 from 6 April 2023, with three years carry forward remaining
- The money purchase annual allowance will increase from £4,000 to £10,000 and the minimum tapered annual allowance will rise from £4,000 to £10,000, again from 6 April 2023
- The adjusted income threshold for the tapered annual allowance will also increase from £240,000 to £260,000 from 6 April 2023
- The lifetime allowance charge will be removed from 6 April 2023, before it is fully abolished in a future Finance Bill. The maximum pension commencement lump sum (also known as tax-free cash) for those without lifetime allowance protections will be retained at its current level of £268,275 and will be frozen thereafter
What are the potential benefits of the changes to the pension annual allowance and lifetime allowance?
These are certainly welcome changes for pension savers, especially at a time when we have seen tax thresholds frozen or in some cases, reduced (such as the additional rate tax band reducing by £25,000 to £125,000), resulting in more workers being subject to higher and additional rate tax.
Pension savers have seen their pension benefits tested against the lifetime allowance since it was introduced during April 2006 and the removal should make it less complicated for those retiring after 6 April 2023.
The combination of these increases to pension allowances will certainly reduce the potential for members of defined benefit pension schemes, most notably GPs and senior NHS professionals, from incurring big tax charges, and hopefully stop the trend of early retirement. Furthermore, removing the pension lifetime allowance might also attract retirees back to work, which was the Chancellor’s intention.
It is potentially beneficial for those who are saving for their retirement through defined contribution pension pots, and while the numbers of those breaching the lifetime allowance are small, that has probably been dwarfed by the number of savers who have ceased saving into pensions before they reach the ceiling. As investment growth can take a pot above the lifetime allowance, not just the amounts contributed, that added further jeopardy for those who have made good investment decisions.
Are there any possible drawbacks?
The one negative of the Chancellor’s announcement is the cap on pension commencement lump sum of £268,275, as it means that pension savers won’t be able to increase their tax-free lump sum above this level, even in the event that contributions and growth result in the value of their pension benefits exceeding £1,073,100. However, the situation is different for those who have some form of lifetime allowance protection in place, as their lump sum will remain protected. But it is still uncertain whether future contributions will impact this and cause people to lose their tax-free cash protection. This still needs to be clarified by HMRC.
Can we make any conclusions at this stage?
On the face of it, increasing and abolishing these pension allowances is welcome and good news, and the changes are likely to enable workers to fund their pension savings and reduce the potential for tax charges. However, the changes won’t simply benefit all savers and this remains a complex area of planning and advice should continue to be sought to ensure that individuals utilise these changes in the most tax-efficient way.
It's important to also consider while the changes announced are intended to encourage the over 50s to return to work, it could actually result in the opposite: with more over 50s taking advantage of these changes and retiring. The removal of the lifetime allowance could now mean that those deferring their retirement can potentially retire on the income they require.
Talk to Evelyn Partners about the changes to your pension allowances
If you have any questions about the changes to the pension annual allowance and the abolition of the pension lifetime allowance and how this could impact your retirement, Evelyn Partners can help. Book an initial consultation with one of our experts now or call us on 020 7189 2400.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
The value of investments, and the income from them, may go down as well as up and investors may not get back the amount originally invested.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.