The Chancellor’s March 2023 budget included some important changes to pensions tax which took effect from 6 April 2023. These relate to the Lifetime Allowance (LTA), the Annual Allowance (AA) and the Money Purchase Annual Allowance (MPAA).
We have set out the headline changes below. These changes could impact our Scheme members in different ways. If you think these changes affect you, we strongly recommend that you speak to a financial advisor before you make any decisions.
What are the changes?
Changes to the Lifetime Allowance (LTA)
What is the LTA and who does it affect?
The LTA is a limit on the pension savings that you can build up and take out over your lifetime without paying an additional tax charge. If you build up total pension savings over the LTA, you generally pay a tax charge on the excess (“this is known as the LTA Tax Charge”) when you take your benefits. The standard LTA for the 2022/23 tax year was £1.073 million.
From 6 April 2023, the LTA Tax Charge on pension savings in excess of the LTA was removed. This means that, if you take your pension benefits and they are in excess of the LTA after this date, they will not be subject to the LTA Tax Charge. They will instead be subject to the same rate of tax as your other pension benefits (i.e., they will be subject to income tax at your marginal rate).
The Chancellor also announced his intention to completely abolish the LTA framework during the 2024/25 tax year. Please note that it is unclear if the proposed abolition of the LTA from 6 April 2024 will proceed, and if it did, how this would be done. Given this, you might want to pause any plans that relate to this until more is known.
It is important to note that, whilst the LTA Tax Charge has effectively been removed, the maximum level of tax-free cash (also called the pension commencement lump sum or PCLS) has not been increased: the maximum tax-free cash amount was frozen at £268,275 (i.e., 25% of the standard LTA for the 2022/23 tax year) other than for members with an existing protection (see below).
LTA Charge and other protections
When the current tax regime started in 2006, the LTA was £1.5 million and over the next few years it rose steadily to £1.8 million. It then started to reduce and as a result, individuals could apply to HM Revenue & Customs (HMRC) for various forms of “LTA protection”. These (and some other protections) typically included scope to take more tax-free cash. Whilst, under the Government’s proposals, these protections will no longer be needed to protect against any LTA Tax Charge from 6 April 2023, they will continue to be relevant to provide a higher cap on tax-free cash.
HMRC has confirmed that anyone who (a) had applied for a protection by 15 March 2023 and (b) retained a valid LTA protection as at 6 April 2023, will retain their entitlement to a higher tax-free cash amount. Depending on the type of protection held, they will, from 6 April 2023, be able to accrue new pension benefits, join new arrangements or transfer without losing their protections. It is important to note however, that if you took any one of these actions before 6 April 2023, you could have caused the loss of certain LTA protections, which among other things would mean losing the enhanced tax-free cash limit.
It is currently possible for members to apply for certain protections, but you will remain subject to the previous legal framework which means you could lose your protection if you accrue new benefits.
If you are about to retire and the LTA could be relevant to you, we recommend speaking to a regulated financial adviser before making a decision.
Increase to the Annual Allowance (AA)
What is the AA and who does it affect?
The AA is a limit on the amount of pension savings that you can build up each tax year while still benefiting from tax relief. Unused allowance from the previous three tax years can also be carried forward.
The Chancellor has announced an increase in the standard AA from £40,000 to £60,000 for the tax year 2023/24.
For high earners, the AA may be lower. If you have a taxable income over £200,000, you will still be subject to the “taper” measure and hence potentially a much lower personal AA. The lowest level of the tapered Annual Allowance (TAA) increased to £10,000 from 6 April 2023 (compared to 2022/23’s lowest level of £4,000) and this will apply for those with taxable incomes (inclusive of employer sponsored pension savings) over £260,000.
This means that you may have the scope to make larger tax efficient pension savings than before. If you had ceased making pension savings, or restricted them, because of the TAA or because your pension savings were at or around the LTA, you may be considering whether to make new pension savings. We recommend that you speak to a regulated financial adviser before making any decisions.
Increase to the Money Purchase Annual Allowance (MPAA)
What is the MPAA and who does it affect?
The MPAA is a further restriction on pensions tax relief which applies in a number of situations if you have “flexibly” withdrawn (for example using income drawdown) any savings from a Defined Contribution (DC) pension scheme from age 55 (or earlier for anyone with specific HMRC protections). This further restricts your opportunity to make further DC/money purchase contributions, or have them made for you, into our Scheme or any other pension arrangement without triggering an AA tax charge.
For the tax year 2023/24, the MPAA increased from £4,000 to £10,000.
This may benefit you if you have flexibly withdrawn DC benefits in the past (for example using income drawdown) but now wish to resume or increase your pension savings from April 2023.
Important Note
The above summary is based on materials issued by the Government up to 5 April 2023. It is not intended to be a comprehensive guide to the Lifetime Allowance, the Annual Allowance or the Money Purchase Annual Allowance.
Whilst this note sets out many details of the announced pension tax changes, there are a number of details which are still unknown or could be different, particularly whilst the legislation for these changes has not been confirmed. As such, if you are considering taking action in relation to these changes, we recommend that you take professional advice from a tax or financial adviser. To find a regulated financial adviser you can go to: https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/find-a-retirement-adviser
If you want to contact the Scheme Administrator, you can go to the Contact Us page of futurefocus.