Post Budget Pension Planning

The March 2023 Budget brought positive news for pensions planning but as ever creates a few new complications and planning points to consider.

There were increases in the annual allowance across the board and everyone under the age of 75 will be able to pay more into their pension from 2023/24 onwards. The key changes to the annual allowance form 2023/24 are:

• The standard annual allowance will increase from £40,000 to £60,000.
• The Money Purchase Annual Allowance will increase from £4,000 to £10,000.
• The minimum tapered allowance will also be increased from £4,000 to £10,000.
• The Adjusted Income threshold will increase from £240,000 to £260,000.
• The full reduction to the tapered annual allowance will apply when Adjusted Income reaches £360,000 or more.

The increases provide a great opportunity for those currently limited by the relevant allowances to increase their contributions in the new tax year. 

All those currently subject to tapering will be able to increase their contributions up to a minimum of £10,000 and as the tapering band has been extended, for many, there will be potential for greater increases.

The higher standard annual allowance gives those with taxable income of up to £160,000 the opportunity to make pension contributions each year to restore their full personal allowance. With an effective 60% tax rate on income in the band between £100,000 and £125,140 and 45% on income above this, there is the opportunity to obtain very high rates of tax relief for those with income at these levels.

The £60,000 annual allowance means higher earners in defined benefit schemes (e.g. hospital consultants and GPs) are now far less likely to regularly exceed the annual allowance and there will be more carry forward available in future years to offset any pension input spikes caused by pensionable pay increases above inflation.

For those in public sector schemes, there are also new rules on calculating pension inputs and these will be of further benefit. The change will allow negative inputs in one section of the scheme to be offset against the pension inputs to another section.

The increased allowances provide greater scope to extract funds from companies in a very tax efficient way.  In addition, the increases in the rate of corporation tax will make employer pension contributions even more attractive.

Note that the previous annual allowances will still apply to the three years prior to 2023/24 when calculating the available carry forward in all cases. 

For any clients impacted by the MPAA, contributions can be increased up to the new £10,000 annual limit. This will be particularly relevant for those still in employment who may not be fully benefiting from their employer contributions due to the MPAA.

The removal of the lifetime allowance (LTA) was the big surprise of the Budget.   The change will take place in two stages.  For tax year 2023/24 the LTA structure will remain in place, however, no LTA charges will apply.   For tax year 2024/25 the proposal is to remove the LTA altogether and we will have to wait for future legislation to see exactly how this works. 

Tax free cash will be restricted to 25% of the current LTA ie £268,275.  However, those with protected amounts can continue to benefit from the higher tax-free cash entitlements. For example, someone with Fixed Protection 14 will continue to have a tax-free entitlement of £375,000.

For those with Enhanced Protection and lump sum protection, the tax-free cash entitlement will be limited to the value of their pension pot as at 5 April 2023.  For example, if their tax protection was 40% and their fund value was £2m on 5 April 2023, their maximum tax-free cash amount will be limited to £800,000 regardless of how much the fund value increases by in the future. 

For, those with fixed or enhanced protection, provided the protection was in place before 15^th March 2023, they can start to contribute again from 6^th April 2023 and the protection will remain valid. This means that they will benefit from any associated uplift in tax free cash even if they make contributions.

Advisers should review those clients who have previously ceased or reduced their pension contributions or opted out of schemes due to the LTA restriction. With the abolition of the LTA, for many there will be an opportunity to recommence or increase their contribution levels.

Whilst this is all good news for retirement planning the big potential issue is the Labour Party’s announcement that they will reverse the decision should they win the next election.  Clearly, we don’t know if they will win, whether if they do they will go ahead with this, and even if they do, exactly how they will enact the reversal.   Therefore, any planning now for those near or above the current LTA has to be take the risk of this into consideration.