Spring Budget 2023 uncovered: Pension changes: Who really benefits?
Inside the Red Book
The Budget announced a few changes to the treatment of pensions.
- The pension annual allowance will increase from £40,000 to £60,000.
- The taper annual allowance starting threshold will increase from £240,000 to £260,000.
- The money purchase allowance will be increased from £4,000 to £10,000.
- The lifetime allowance will be completely scrapped.
These changes mark a reversal of years of progressive reductions in pension reliefs and limits. Whilst they will do a lot to help high earners, they will do little for most people.
So the changes, especially the removal of the lifetime allowance at around £1m, will benefit high earners with sufficient time to build up their pension. But high earners who are already capped by the annual allowance limit and are close to retirement will see less benefit.
Those who are able to take advantage of the changes could enjoy a significant planning opportunity.
Pension annual allowance
This is the amount you and your employer can put into your pension each year before triggering an additional tax charge.
The limit has been the lower of £40,000 or earnings, but will be £60,000 from April 2023.
Taper annual allowance
For higher earners, the annual allowance is tapered. For each £2 that your income exceeds £260,000 (previously £240,000), you lose £1 of your annual allowance.
The allowance taper was previously capped at £4,000. From 6 April 2023, this will rise to £10,000.
This means anyone with an income of £360,000 or more will have a fully tapered annual allowance of £10,000 from 6 April 2023.
The increase is a significant tax saving for those earning more than £360,000, boosting tax-relievable pension contributions.
Money purchase allowance changes
If you have taken taxable money from your pension plan through a drawdown arrangement or by cashing in your pension, you have a reduced allowance. This is called the money purchase allowance and it reduced your allowance to £4,000.
But this amount will now increase to £10,000 from 6 April 2023, making it easier for people to keep working and saving once they have started to draw their pension.
The big and unexpected change was the scrapping of the lifetime allowance charge. This was £1,073,100 (frozen in the last Budget until 2026). If at the time the pension was taken, or when there was another crystallisation event, the value of the pension was over the allowance, there was a charge on the excess. This charge was up to 55% of the amount over the lifetime allowance.
But from 6 April 2023 the lifetime allowance will be scrapped, so there will be no lifetime allowance charges from that date. Please note the tax-free entitlement (the tax-free lump sum you can take when you draw your pension) will remain at 25% of the current lifetime allowance. So the maximum lump sum will remain at £268,275.
Although this measure is unlikely to do much for most people, those with pensions over £1m will enjoy a massive tax saving. What’s more, the scrapping of the lifetime allowance gives pension holders the opportunity for unlimited tax-free growth.
The change may have been designed to help NHS doctors, but it will also give the highest earners a massive Inheritance Tax (IHT) planning opportunity. As pension pots sit outside the estate for IHT, this offers the wealthy the chance to leave their pension pots to their children free of IHT or a cap.
If you would like further advice, please contact Stephen Kenny.