The Spring Budget: what it means for your pension

The Spring Budget, presented to the UK Parliament on Wednesday 15th March, contained some surprising measures, including changes to the pensions landscape. Adam Swift, Wealth Planner, outlines what this means for pension planning.

Adam Swift, Wealth Planner
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In the Spring Budget, Chancellor of the Exchequer Jeremy Hunt took the unexpected decision not to increase the pensions lifetime allowance (LTA), as had been sneakily fed to the press in advance, but to abolish it altogether. Subsequent detail has confirmed the LTA tax charge will be removed from the beginning of the 2023/24 tax year, with plans to abolish the LTA from April 2024.

What is the lifetime allowance?

The LTA is a cap on pension savings, which are tested against the allowance at various benefit crystallisation events (BCEs), which include, amongst others: 

  • when tax-free cash is taken from a personal or occupational money purchase pension or
  • the commencement of a defined benefit pension, or 
  • certain pension values at age 75.

Where pension savings exceed the LTA at a BCE, the excess is subject to a tax charge. This is 55% if the excess is paid as a lump sum and 25% where the excess is designated to drawdown (from which a taxable income can be drawn) or used to purchase an annuity. The amount of tax-free cash that can be taken is also restricted to a maximum of 25% of the LTA or the value of the pension fund, whichever is lower.

To complicate matters further, the lifetime allowance has undergone significant change since it was first introduced on 6 April 2006 and a number of transitional protections have been available to offset the impact of these changes (enhanced protection, primary protection, fixed protection and individual protection – each with their own set of specific rules and stipulations).

More recently, the standard LTA was reduced from £1.8 million in 2012 to £1 million in 2016 before increasing to the current amount of £1,073,100. In the Autumn Budget, the Chancellor had extended the freezing of the LTA to April 2028.

What are the implications of abolishing the LTA?

First and foremost, it is seemingly good news for those with existing uncrystallised pension funds in excess of their remaining LTA who can now crystallise their benefits from 6 April 2023 without fear of the LTA tax charge. Along with the LTA, the requirement to commence early crystallisations to mitigate the LTA tax charge may go too.

Secondly, those with pension funds approaching or in excess of the LTA may no longer need to redirect their pension savings to avoid incurring the LTA tax charge on future crystallisations. This will be particularly beneficial to high earners who can benefit from higher or additional rate tax relief on their contributions (and potentially reclaim their personal allowance at a marginal rate of relief of 60%).

However, is all as rosy as it seems? It appears that the tax-free cash available on pensions will now be frozen at £268,275 (25% of the current LTA) whilst individuals with LTA protection will retain a tax-free cash limit of 25% of their protected LTA. This restricts the benefit of the LTA removal and means some contributions may now be tax neutral where they will not benefit from any tax-free cash.

Perhaps more importantly, the Labour Party has wasted no time in stating they will reinstate the LTA if elected next year. As such, it is logical to raise doubts regarding the longevity of the proposals, which could encourage individuals to leave their pension funds to benefit from the generous tax reliefs. 

Changes to the annual allowance

The Chancellor also announced changes to the pension annual allowance, which is an overriding limit on tax-relievable pension contributions. This will be increased from £40,000 to £60,000, though the tapering rules will continue to apply from a new threshold of £260,000. The minimum annual allowance will also increase from £4,000 to £10,000, which will apply to those with an adjusted income (total taxable income plus employer contributions) in excess of £360,000. The money purchase annual allowance is also set to increase back to £10,000 in the new tax year, helping savers who have already flexibly accessed their benefits.

What does this mean for you?

Clearly, with such wide-ranging changes to pensions as a whole, it makes sense for all those impacted to review their personal situation once the specific detail is confirmed in the Spring Finance Act and the subsequent Finance Bill. 

Other announcements in the Budget

Away from pensions, there were no changes to personal tax rates, bands or allowances following previous announcements, most notably in the Autumn Budget. It was confirmed the ISA and Junior ISA / Child Trust Fund allowances will remain at £20,000 and £9,000 respectively and the starting rate band was also confirmed to remain at £5,000 for the year ahead. The Chancellor chose not to address some of the more emotive issues, such as the non-dom regime, and ultimately there were relatively few noteworthy tax changes outside of pensions.

As always, the devil will be in the detail. However, there is no doubt that Wednesday’s announcement will have far-reaching consequences in the UK pensions landscape, in the short term at least.

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