4 important Budget pension changes and what they mean for your clients

It’s been a few years since there were any major changes to pension rules in a Budget. Back in 2014, George Osborne announced the so-called Pension Freedoms and removed the upper limit that restricted the amount of income an individual could withdraw from defined contribution pensions.

While there have been tweaks to the rules since then, and none of them too favourable, last week’s Budget announcements from Jeremy Hunt feel like a throwback to the 2000s and 2010s.

Then, Budget day could often leave the pension industry and advisers in shock, feverishly consulting the Budget documents to see how the new announcements would affect clients, who will inevitably soon be on the phone asking what this will mean for them.

You’ve probably had some time to digest the changes and no doubt you have read many a Budget summary by now. However, we still wanted to provide our take on the announcements made in the Budget and how this will affect advisers and clients that work with IPM.

The key takeaways are:

• The Lifetime Allowance (LTA) tax charge has been removed in 2023/24 with the allowance itself set be abolished. This was the upper limit that all an individual’s pension savings were measured against at various times known as “Benefit Crystallisation Events” (BCEs), including where an individual crystallised benefits and reached age 75.
• The pension commencement lump sum (PCLS) will be frozen at £268,275 unless an individual has previously applied for protection.
• The Annual Allowance will increase from £40,000 to £60,000 from 6 April 2023.
• The dreaded Money Purchase Annual Allowance (MPAA) and Tapered Annual Allowance (TAA) have been increased from £4,000 to £10,000 from 6 April 2023.

The Lifetime Allowance has gone…almost!

The biggest pension related announcement from the Budget concerned the LTA.

It had been rumoured that the LTA would increase from its previous frozen level of £1,073,100 up to its historic highest level of £1,800,000. However, Jeremy Hunt went further than this and unexpectedly scrapped it altogether!

Well, almost. There are some important caveats.

Firstly, from 6 April 2023 the LTA charge will be removed. The chancellor has said the government will abolish the LTA itself in a future Finance Bill.

Furthermore, and significantly, the maximum PCLS will remain at £268,275 (25% of the old LTA of £1,073,100) unless there are pre-existing protections in place.

This dampened our excitement a little, as we thought the removal of the LTA would mean we could say goodbye to the various, complex historic protections from the LTA. Remember primary protection, enhanced protection, fixed protection 14 and the rest?

It seems it’s not time to throw away any LTA protection certificates just yet. A client may still require these when they come to draw their PCLS if they have a protected entitlement greater than £268,275.

And while we wait for the famous “devil in the detail”, we suspect the restriction on the PCLS means that providers will need to collect information about any other pension benefits an individual is entitled to before making a PCLS payment.

This is to ensure that the individual still has entitlement to PCLS and this has not been taken elsewhere.

Increase to the Annual Allowance

The Annual Allowance is the upper amount an individual can contribute or accrue in pensions on an annual basis and receive tax relief on.

From 2016, this has been set at £40,000. From 6 April 2023, this will increase to £60,000 a year.

While this is good news for those who wish to make larger contributions to their pension schemes, it should be remembered that, for personal contributions, tax relief is granted on contributions up to 100% of earnings in that tax year, or the Annual Allowance, whichever is the lower.

So, individuals will still need to have the earnings to take advantage of the higher Annual Allowance and receive tax relief.

The option to carry forward unused Annual Allowance from previous tax years is still available.

This means that a client could make a potential tax relievable contribution of £180,000 to a SIPP from 6 April 2023 (using the Annual Allowance of £40,000 for 2020/21, 2021/22 and 2022/23 and £60,000 for 23/24).

With Corporation Tax set to rise in April for companies with profits in excess of £50,000, clients may be able to use this enhanced Annual Allowance to make additional employer pension contributions and mitigate this rise.

Money Purchase Annual Allowance (MPAA)

One of two generally unpopular limitations to the Annual Allowance, the MPAA kicks in as soon as an individual takes flexible income, for example income under flexi-access drawdown or received an uncrystallised funds pension lump sum (UFPLS) payment.

Previously, this saw a client’s Annual Allowance reduce from £40,000 to £4,000.

We suspect the thinking behind this was to prevent people from accessing large portions of their pension benefits – something that had been made possible under the Pension Freedoms announcement in 2014 – and putting these back into a pension, effectively gaining from double tax relief.

The reality was that this became prohibitive and inflexible when people had a genuine need to flexibly access their pension savings – for example, during the Covid pandemic. They were then unable to build their pension savings up sufficiently once they started earning again.

In this year’s Budget, the chancellor announced that the MPAA will increase from £4,000 to £10,000 from 6 April 2023. While we would have preferred he had scrapped it completely, it’s certainly a step in the right direction.

Tapered Annual Allowance (TAA)

The second limitation on the Annual Allowance comes in the form of the TAA. This is more complex than the MPAA and is designed to restrict the amount of tax-relievable contributions higher earners can make.

From 6 April 2023, individuals with taxable income in excess of £260,000 (an increase from £240,000 to take into consideration the increase in Annual Allowance) will have their Annual Allowance reduced by £1 for every £2 they earn over this amount.

The maximum restriction will be £50,000 (new Annual Allowance of £60,000 less the “minimum taper” of £10,000). So, if an individual has taxable earnings of £360,000 or more, the most they can contribute and receive tax relief on would be £10,000.

That said, the TAA does not apply to those individuals who have threshold income of £200,000 or less. The definitions of both “threshold income” and “adjusted income” are important in understanding whether an individual is affected by the TAA. There’s some useful information on the government website.

IPM are preparing for these reforms

Judging by the calls and emails we have received in the last few days, many clients will be looking to take advantage of the new rules from 6 April. However, there are also a lot of questions.

Rest assured we are working hard to ensure all our understanding, systems and literature is in place to accommodate the changes by 6 April.

However, as is the case with any announcement of this nature, we are sure more detail will come out in the coming days that will affect how providers administer their schemes going forward.

Get in touch

If you want to have a chat about the impact of the Budget on your clients, or how these changes could affect their SIPP contributions, please contact us. Email info@ipm-pensions.co.uk or call 01438 747151.