Adviser reaction to budget pension changes and lifetime allowances

Following the Spring Budget on 15th March and the many changes made in the pension arena, three of our Chartered Financial Planners give their views on the implications of some of the headline announcements.

James Batchelor, Chartered Financial Planner:

The abolition of the lifetime allowance is significant because it means that members of pension schemes (whether Defined Contribution or Defined Benefit) will no longer be capped in terms of the maximum benefit they can accrue over their lifetime without paying tax penalties.

In addition to the above, the increase in the annual allowance (the amount you can save into pension plans in one tax year before you start paying a tax charge) from £40,000 a year to £60,000 a year will permit greater levels of pension contribution for working-age people. Whilst this may be out of reach for many employed individuals, it reduces the penalties for those in defined benefit pension schemes who have no control of the amount going in and who get taxed on it, such as some NHS employees.

It also opens up some fantastic opportunities for shareholders and directors to receive a higher share of their remuneration via pension contributions. This has the dual benefit of reducing the Corporation Tax burden of the company making the payments, which is valuable given the April increase in Corporation Tax, as well as relieving the employer and employee National Insurance contribution liability.

The money purchase annual allowance will be increased from £4,000 per year to £10,000 per year, meaning that individuals who have already accessed their pensions flexibly will be able to contribute a larger amount into pensions on an ongoing basis if they wish to. In spite of the increased annual allowance, pension scheme members should still be aware of the tapering of that annual allowance in the instance of high income.

All of the above means that whilst pensions are not explicitly designed for this purpose, their attractiveness for Inheritance Tax planning will likely increase. The lifetime allowance tax charge will no longer offset the benefit of removing assets from a person’s estate by paying their wealth tax-efficiently into pensions. This is especially true if the pension holder can pay lower levels of income tax (or even none at all) when they withdraw the money from the pension, or pass the fund on tax-free to beneficiaries, as opposed to keeping it in their estate and later paying the headline rate of Inheritance Tax on it.

Victoria Ross, Chartered Financial Planner:

The changes to pensions taxation are significant and what many clients will want to know is should they be considering anything differently in relation to this tax year ending April 5th and what may change in their planning for the longer term.

The fact that Labour has said it would reinstate the lifetime allowance if elected does leave those with significant pensions pots in some amount of uncertainty however and underlines the real need for stability in our pension system. Any decisions should therefore be weighed up with the potential downsides of the lifetime allowance making a comeback in the next two years.

In relation to this tax year, high earners who were planning to crystalise their pensions may want to hold off until after April 6th, if they were anticipating a lifetime allowance (LTA) charge.

Those who have held off making pension contributions for this tax year for fear of a future LTA charge may want to consider some last-minute payments. This includes those with unused pension allowance in the 2019/20 tax year that will otherwise be lost in the new tax year, as well as those with taxable earnings to shelter this year.

People with defined benefit pension schemes who’ve taken advantage of the ‘scheme pays’ facility to pay annual allowance breaches in relation to the 2021/22 tax year to help mitigate future LTA charges may also want to explore reversing this with their pension scheme administrator. This is where the administrator pays the annual allowance charge direct to HMRC on an individual’s behalf, and their future pension benefits are reduced accordingly.

Those people who have crystalised a pension this year and paid a charge on the excess amount above the lifetime allowance are likely to wonder if they can apply for any kind of rebate, but unfortunately, based on previous taxation changes, this will be unlikely.

Despite the lifetime allowance being removed, tax-free cash will be limited for most people to the current maximum level of £268,275 and benefits above this will be subject to income tax. At time of writing, commentators have suggested that those with a fixed or enhanced protection in place on the day of the Budget – 15 March 2023 – will be able to accrue new benefits from 6 April 2023 without losing their existing protected tax free amount.

Finally, I’m delighted with the £4bn commitment to childcare and the extension of 30 free hours per week to parents of children over nine months. This is so important in terms of helping parents, and especially women, to remain in the workplace and therefore in helping to address both the enduring gender wealth and pension gap.

Nick Onslow, Chartered Financial Planner:

Beyond the headlines coming out of Jeremy Hunt’s first Budget, as ever, the devil is in the detail.

In relation to the pension changes, there are many areas which are in reality quite complex and until the finer details are finalised, I’d urge caution as knee jerk reactions could result in costly mistakes.

Despite the abolition of the lifetime allowance (LTA), for most people, the amount you can take as your tax-free entitlement will stay at 25% of the previous lifetime allowance limit of £1,073,100, so people must still ensure that they don’t breach their tax-free threshold.

In light of the Labour Party announcing their intention to reverse the removal of the LTA, pension savers have a two-year window of opportunity in my view and seeking expert advice is more important then ever. Those with existing financial plans would also be wise to revisit these with their financial planner, to ensure that any relevant changes are factored in.

For senior public sector workers with fluctuating incomes, such as doctors, the abolition of the lifetime allowance should help extend their working lives by removing the tax liability that discouraged them from staying in their roles, retaining valuable experience within their sectors.

Restoring the money purchase annual allowance to its previous level of £10,000 should also help to incentivise those who have started drawing on their defined contribution pension pot back into the workplace, working hand in hand with the government’s new ‘returnerships’ programme.

For our summary of the UK Spring Budget, highlighting the key aspects likely to affect you, please click here.

Spring Budget 2023 - Download the report

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