In the same week that many punters backed the favourite in the Cheltenham Gold Cup, the bookies are unlikely to have taken a hit on the winner of the 12:30 at Westminster the preceding day – namely, the abolition of the Lifetime Allowance (LTA), writes Paul Forman, international sales and technical manager at Novia Global.
Many industry commentators had speculated that the LTA would see a boost from the current £1.073m to the £1.8m ($2.22m, €2.1m) level last seen in 2012, but with one eye on the next election – more on this later – Chancellor Hunt pulled a rabbit out of the hat with an unexpected announcement that he was abolishing the LTA altogether.
First introduced in April 2006 as part of the ‘A’ Day pension changes, the LTA limit applies to all UK pensions and controls the total amount someone can save in a tax-advantaged way into their pension, without having to pay additional tax costs.
These costs are based on the total value of all the pensions a person has used in their lifetime.
However, this positive news that the LTA is to be abolished came with a catch. Tax-free cash, or pension commencement lump sum (PCLS) to give it the proper title, will be capped for pension savers at £268,275 going forwards from tax year 2023/24. Although those who have previously applied for lifetime allowance protection will get to keep any higher tax-free cash amount entitlement.
Initially it was feared that those with enhanced or fixed protections already in place might lose their protection – and therefore their higher PCLS entitlement – if protection rules were broken, by paying more into their pension. The subsequent Finance Bill has now confirmed that this protection will be based on 5/4/23 values for enhanced protection clients.
Announcing these changes, Chancellor Hunt said that it is hoped that removing the limit will mean workers will now start to, restart, or increase their pension savings.
Another significant and anticipated change of policy was concerning the Annual Allowance limit. The Annual Allowance is the maximum amount of pension savings an individual can make each year with tax relief without incurring a tax charge, the aim of which is to recoup some of the tax relief given if the system is excessively used. In the Budget, the Chancellor has now confirmed the annual tax-free pension allowance will rise from £40,000 to £60,000 from 6 April 2023.
This was less of a shock, given the press articles in recent times highlighting a specific issue with senior NHS staff and ongoing contributions to the NHS pension scheme being a contributing factor towards experienced consultants leaving the service earlier than they might have intended.
The Finance Bill clarification also gave good news to LTA protected clients in this regard too. Without this, in effect, this could have stopped them from being able to benefit from the removal of new annual allowance tax limits However, it is good news to learn that instead, they will be free to start paying in contributions or transfer pension arrangements without any consequences.
In addition, they might now be able to carry forward their unused annual allowance from the previous three years, meaning they could pay a total contribution of £180,000 next tax year if they have earnings to support it.
In addition, the Money Purchase Annual Allowance (MPAA), a reduction to the Annual Allowance for individuals who have flexibly accessed their money purchase pension savings, will rise from £4,000 to £10,000 from April 6, 2023.
This same increase also applies to the Tapered Annual Allowance which is a reduction to the Annual Allowance for individuals with income above set levels. The adjusted income threshold for the tapered Annual Allowance will also rise from £240,000 to £260,000 as of next month.
As a result, the MPAA – introduced to prevent wealthier savers recycling their tax-free lump sum into new pension arrangements – is now back to where it was when originally introduced, at a level of £10,000. The old £4,000 limit meant that anyone returning to the workplace after accessing their pension funds flexibly, would exhaust their limit with a £50,000 annual salary at the current auto-enrolment 8% contribution rate.
Whether this change encourages older workers back to work, remains to be seen as there is a potential issue that highlights the complex nature of the tapered allowance policy. For example, someone earning sufficient salary to take advantage of the new £60,000 annual allowance, might potentially trigger the taper with the result being that they cannot benefit from the higher allowance.
Effectively, this will impact anyone who had hoped to build up their pension savings late in their career at a time of peak earnings, after previously prioritising other financial commitments such as mortgage payments, childcare costs or even career breaks.
As with any UK legislation change, it brings an excellent opportunity for overseas advisers to add value with their expat client base who are likely impacted by complex issues, such as changes to pension allowances and limits.
This would seem to be a particularly sensible course of action for any client currently using a ROPS scheme, especially where such previous transfers have been recommended for LTA planning purposes. In many cases, an uncapped UK pension such as a Sipp scheme, can now offer a cost-effective, flexible and viable alternative.
Positive that these changes might be, as always for advisers, there are three certainties in life – death, taxes and the inability of successive UK governments to tinker with pension rules and legislation.
Already, the shadow Chancellor Rachel Reeves has announced that should Labour win the next UK election (due by December 2024), that they will look to reverse the announcement and re-introduce some form of LTA limit.
As a result, advisers might have to act quickly if their upcoming client reviews indicate that a change of planning is prudent right now.
This article was written for International Adviser by Paul Forman, international sales and technical manager Novia Global.
