Massive pensions giveaway in Hunt’s ‘Growth’ Budget
What has happened?
Chancellor Jeremy Hunt announced a huge pensions giveaway, among other things, in Wednesday’s Spring Budget 2023, with the lifetime allowance tax charge set to be removed from April 2023 and the lifetime allowance, currently £1,073,100, set to be abolished completely in April 2024.
This news will delight savers who have pension benefits in excess of the lifetime allowance as they will no longer be subject to a lifetime allowance tax charge of 25% (or 55% if taken as a lump sum) on their benefits in excess of the limit. However, they will be disappointed to see the maximum pension commencement lump sum (PCLS, otherwise known as tax-free cash) available will be limited to its current level of £268,275 (which is 25% of the current lifetime allowance) for those without lifetime allowance protection and this limit will remain frozen in future. We view this as significant, as inflation is likely to significantly erode this limit over time.
In addition to the above, the Chancellor also confirmed that from the 2023/24 tax year:
- The annual allowance will increase from £40,000 to £60,000;
- Tapering of the annual allowance will apply for those with adjusted income (broadly speaking taxable income plus employer pension contributions) of £260,000 or more (rather than £240,000 as is currently the case);
- The minimum tapered annual allowance will increase from £4,000 to £10,000;
- The Money Purchase Annual Allowance (MPAA) which applies to those who have already ‘flexibly’ accessed income from their pensions, will increase from £4,000 to £10,000 p.a.;
- The ability to ‘Carry Forward’ unused annual allowances for the three previous tax years will remain.
The above means that individuals who have exceeded the lifetime allowance may now want to think about pension contributions again, and the annual allowance changes may allow them to contribute more into their pensions than they were previously able to (from 6 April onwards). Though it may be the case that no further tax free cash is available to these individuals, higher or additional rate income tax relief could still be available on pension contributions, with lower rates of income tax potentially payable when benefits are taken in retirement. Additionally, pensions retain the benefit of being outside the individual’s estate for inheritance tax purposes upon death.
What are the risks?
This does feel like an unusually generous tax change and with Labour ahead in the polls with the next General Election due within the next two years, these changes could be at risk of being reversed. Indeed, Labour have already stated they would reverse the abolition of the Lifetime Allowance, so any changes to financial plans should be carefully considered before implementation.
What action should you take?
In terms of immediate action, as the annual allowance changes will not take effect until the new tax year, if you have already maximised your pension allowances for the current year, it may be that no action is required. However, if you previously decided not to utilise your pension contribution allowances because your total benefits exceeded the lifetime allowance, it could make sense to consider a pension contribution this tax year. In the new tax year, there could be scope for all individuals to change their financial plan as a result of the changes, so undertaking a review would be advisable. However, those with Lifetime Allowance Protection should exercise caution before re-starting pension contributions, as this will break their Protection and reduce their tax-free cash lump sum entitlement to £268,275.
Whatever your circumstances, we recommend speaking to a TPO Financial Adviser to discuss the most appropriate course of action.
Please note: This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. The Financial Conduct Authority (FCA) does not regulate tax advice. Investment returns are not guaranteed, and you may get back less than you originally invested.