Spring Statement 2023 Report
Yesterday marked Jeremy Hunt’s first budget of the calendar year, and it was certainly a big one for pensions.
There were rumours in the press in the days prior to the budget that the Chancellor would be increasing the Annual Allowance and Lifetime Allowance but we didn’t expect the announcement that he made to be quite so generous!
You can find the full details of the announcement in our full report here, but our Financial Planner, Jack, has also picked out the key points about pensions and explained when they will happen, and shared his thoughts…
Lifetime Allowance
What is the Lifetime allowance
The Lifetime Allowance is a ceiling on how much you can have in a pension scheme. The current standard Lifetime Allowance is £1,073,100 and any pension benefits above this are taxed at the appropriate rate.
What’s changed
Removal of the Lifetime Allowance charge and abolishment of the Lifetime Allowance.
When it will happen
The removal of the charge will happen on the 6th April 2023 and the abolishment of the Lifetime Allowance will happen on the 6th April 2024.
Why it’s happening
It’s been said, senior highly skilled workers such as doctors in the NHS were opting out or leaving work because they were accumulating large pension pots and paying tax on the excess. The removal of the charge and abolishment of the allowance should incentivise those to continue working.
My thoughts
This is a welcome change which should encourage more people to pay into pensions and save towards retirement. The abolishment will save those with pension pots above the current lifetime allowance between 25% and 55% tax on the excess.
Currently, you can take up to 25% of uncrystallised funds held within a pension as a tax-free lump sum, although this is capped at the lower of your fund value and the Lifetime Allowance. The maximum tax-free lump sum will remain at 25% of the current Lifetime Allowance (£268,275). When the Chancellor abolished the Lifetime Allowance our initial thoughts were that individuals would be able to withdraw 25% of their total pension fund however capping it at 25% of the current allowance does appear to be a fair compromise.
Interestingly, those with Lifetime Allowance protections, such as Fixed and Individual Protection where their Lifetime Allowance is higher than the standard amount, will still be able to benefit from a greater tax-free lump sum. For example, those with Fixed Protection 2016 will have a Lifetime Allowance for tax-free cash purposes of £1,250,000, meaning they will be able to take a maximum tax-free cash lump sum of £312,500.
For those taking a lump sum from their pension above their applicable Lifetime Allowance for tax-free cash purposes, the excess will be taxed at their marginal rate of Income Tax.
Annual Allowance
What is the Annual Allowance
The gross amount you can pay into a pension each year and receive tax relief on the contributions and is currently £40,000.
What’s changed
The new Annual Allowance will be £60,000, an increase of £20,000.
When it will happen
6th April 2023.
Why it’s happening
For the same reasons as the Lifetime Allowance, to encourage people to save towards retirement and to reduce the amount of doctors paying an Annual Allowance charge, incentivising them to stay in work.
My thoughts
This is also a welcomed change and makes pensions an even more attractive tax wrapper. The increase will mean that companies can save between £3,800 and £5,000 extra a year in Corporation Tax, encouraging entrepreneurship and saving towards retirement.
Money Purchase Annual Allowance
What is the Annual allowance
The Money Purchase Annual Allowance is a separate allowance which restricts how much a person who have flexibly accessed their Defined Contribution pensions can contribute and is currently £4,000.
What’s changed
This allowance will now be £10,000, an increase of £6,000.
When it will happen
6th April 2023.
Why it’s happening
To encourage those accessing their pensions early to stay in work, and those who left employment to return to work.
My thoughts
Similar to the Annual Allowance, this will encourage more people to pay into pensions and not restrict those who have drawn a flexible income from saving again in the future. We know that an individual’s circumstances will change from time to time, so we’re pleased to see the government acknowledge this.
Tapered Annual Allowance
What is the Tapered Annual allowance
A reduction in the Annual Allowance from £40,000 to £4,000 for those with an income between £240,000 and £312,000.
What’s changed
The new Tapered Annual Allowance will be £10,000 and the taper will start for those earning between £260,000 and £360,000.
When it will happen
6th April 2023.
Why it’s happening
To encourage high earning doctors to stay in employment and continue contributing to a pension.
My thoughts
Again, a change in the right direction to encourage saving towards retirement.
Conclusion
Overall, this was a very positive budget for pensions. The removal of how much you can have in a pension and an increase to how much you can pay in, coupled with the rising Corporation Tax, opens up an already wide avenue to build up wealth for retirement.
On the flip side, we know governments change and so does tax legislation. The Labour Party have already confirmed they’d reverse this removal of the abolishment of the Lifetime Allowance if they win the next general election, so it wouldn’t be a surprise if these changes are challenged.
As always, if you have any questions then please don’t hesitate to get in touch with one of the team.
