When a Chancellor of the Exchequer really wants to pull a rabbit out of the hat, they often turn to pensions.
In this year’s Budget, Jeremy Hunt did not disappoint, reducing the lifetime allowance charge to zero from April 2023 and abolishing the LTA from April 2024.
From April, the annual allowance has risen from £40,000 to £60,000, the adjusted income threshold for the tapered annual allowance increases from £240,000 to £260,000, while the money purchase annual allowance is rising from £4,000 to £10,000.
Amid the generosity, one minor restriction that could become a major one saw the pension commencement lump sum frozen at £268,275.
Hunt justified the reforms as removing disincentives to working to a later age for higher paid NHS professionals, but also, post-pandemic, concerns about early retirement across the whole workforce.
For doctors and bankers?
The move was welcomed by doctors’ leaders and indeed accountants and financial advisers who provide specialist advice to health professionals.
There was criticism too. Torsten Bell, chief executive of the Resolution Foundation, noted it would help almost as many bankers as doctors adding: “It’s a big victory for NHS consultants but poor value for money for Britain.”
The views of Shadow Chancellor Rachel Reeves also received a lot of attention. She said Labour would scrap the scrapping of the LTA and create a targeted scheme for doctors.
Indeed, Karen Goldschmidt, partner at LCP says they are recommending including the statement from Reeves in member communications. She says: “The abolition of the LTA charge and increase in AA creates opportunities for some individuals and for sponsors and trustees – but the apparent active threat of reversal means these may be limited. Obviously, at all times, there is a possibility that a future government makes changes to tax regimes. In this case, the risk is much higher. We are therefore recommending that the statement by Rachel Reeves is included in member communications.”
Assessing the politics, Tom McPhail, director of public affairs at consultancy the Lang Cat says: “Both sides of the House haven’t yet thought this all through. The Conservatives have created a structure that rewards the wealthy for not drawing on their pensions, thanks to the preferential death benefit treatment relative to IHT. Given the amount of tax relief handed out to those wealthy people to build their pots in the first place, this doesn’t look politically sustainable.
“For Labour, the knee-jerk response threatening to reverse the Budget changes doesn’t look sustainable either. If they go into the next election promising the re-introduce the LTA, I think that will prove unpopular, as would a promise to create a bespoke carve out for doctors.
“However, I think the MPAA and PCLS changes are a done deal; no one is much interested in changing them back again.”
No big boom
Financial planners have been busy, but is it changing individual retirement strategies? Perceptive Planning director Phil Billingham says: “The two changes everyone is talking about are LTA and AA changes. I don’t think LTA is changing anyone’s behaviour, rather it is affecting people who are already affected. The planning blight came straight away with Labour saying they will undo it. We all know it is more likely
than not there will be a change
of government.
“There is individual planning work to be done, but in terms of a big boom of ‘everyone should do something’, we are not seeing any of that.
“The AA could see behavioural shifts given the rise in corporation tax. Higher tax on corporation tax and dividends may lead those people who can afford it to put money into pensions. It is so much cheaper to do that and build up wealth or an asset outside of the company.”
Because of the uncertainty pension lawyers urge a little caution. Georgina Jones, partner at Sackers, says: “There is no specific requirement for trustees to communicate the LTA, AA and MPAA changes to members, although in our experience most have done so to help members gauge the impact on their personal tax arrangements.
“Communications about pensions tax must be drafted carefully to avoid trustees straying the wrong side of the line and giving financial advice, which would be unlawful. It is essential to keep to the facts – what is changing, how and when. We’ve also recommended pointing out current unknowns. The removal of the LTA altogether from April 2024 is just a headline at present, and the finer detail of the legislation will not be published for some time yet.
“The Budget changes are not a done deal until the Finance Bill becomes an Act, likely at some point before August. Given the recent political climate and the fact that a future government could reverse changes, sounding a clear note of caution to members seems sensible.”
Robin Dargie, senior consultant, at Quantum Advisory says: “We feel that it is still too early to communicate to pension scheme members about the changes to the Lifetime Allowance and the £268,275 maximum pension commencement lump sum. A change like this needs to be enshrined in legislation, likely to be a future Finance Act, which should repeal large swathes of the rules in the relevant part of the Finance Act 2004 that originally introduced the Lifetime Allowance. HMRC will need to do a major rewrite of the Pensions Tax Manual too. It’s for these reasons that LTA checks still need to be done for another year and all that’s happening from 6 April 2023 is the Lifetime Allowance charge is being set to 0 per cent.
“For those individual cases where members would have been subject to a Lifetime Allowance charge had they retired before 6 April 2023, those members were contacted to see if they still wanted to retire before the end of the tax year.
“The AA and MPAA changes are more straightforward and do not warrant specific member communications, as they are set out in members’ retirement packs. Both allowances have increased in any case, so that members have more scope to pay extra contributions, rather than less. The chance of having to pay an Annual Allowance charge is therefore reduced.”
Grey areas
Matthew Arends, partner and head of UK retirement policy at Aon says: “Pensions tax allowances fall into a grey area of personal taxation that individuals find extremely difficult to navigate. For this reason, we are seeing many employers and pension scheme trustees wanting to communicate on a factual basis the changes that are taking place for the 2023/24 tax year and beyond and, where relevant, to update retirement modellers and to adjust cash alternatives to pension accrual accordingly.
“Some are going further to provide specific guidance to affected individuals. Additionally, the knock-on impact is causing some to re-evaluate their approach to upcoming big projects such as GMP equalisation if potential tax charges on individuals were a material factor in decision-making.
He is also concerned about a lack of stability in the rules. “It is unclear at this stage whether the changes, including the increase in the MPAA, will encourage individuals out of retirement and back into work. One element of this is the uncertainty over the rules for tax allowances in future: the history of the lifetime allowance under successive governments, for example, is that since introduction it has been increased, reduced, frozen and now abolished.”
Goldschmidt adds: “Generally, we would expect schemes to communicate with all their members about the changes. These are mostly matters for those with big benefits – but how does a trustee know whether a member with small benefits in their scheme might have big benefits in another? A simple communication to all is the best bet. We cover both the immediate changes from 6 April 2023 and the planned ones that will take a little longer for HMRC to formulate in terms of how the freeze on the tax-free cash cap will work, and the abolition of the lifetime allowance.”
Susan Waites, partner at Hymans Robertson, says: “We’ve used a range of generic and targeted communications to make clients aware of the changes. These include written communications, webinars, updates to modellers and one-to-one discussions. Where appropriate we’ve helped clients to update policies, for example provisions that allow employees impacted by restrictions on pension tax relief to take a cash allowance in lieu of some / all pension contributions. We’ve also updated employee communications so that individuals are aware of the new AA (including MPAA) limits and removal of LTA which, for many, means an opportunity to increase or re-start tax efficient pension saving.”
There are different strategies depending on the type of scheme consulted upon.
James Jones-Tinsley, self-invested pensions technical specialist at Barnett Waddingham says that besides updating blogs and Q&As, immediately following the Budget speech, they identified and contacted those Sipp & SSAS members who were undertaking a Benefit Crystallisation Event where a Lifetime Allowance excess was likely to arise, to ask them if they wanted to wait until the new tax year before completing the transaction, as well as encouraging them to seek financial advice regarding this, if they did not already have an adviser.
He says: “Coupled with the potential for new pension contributions for those members with Enhanced or Fixed Protection, without a loss in that protection (depending upon the date the protection was first acquired), opens up new avenues for pension funding that were previously deemed not possible. As a result, many of our Sipp and SSAS members will be seeking financial advice, in order to take advantage of this new pensions landscape – subject, of course, to the new rules becoming law.”
Some consultants say some employers will review benefits and public sector schemes could see rejoiners. Jonathan Seed, scheme actuary and head of pensions strategy, at Cartwright says: “We expect to see employers with high paid and/or long serving staff review wider benefit provision as there may be significant financial benefit to providing a higher level of pension provision with other forms of remuneration reduced. We also expect to see employers reviewing opt out arrangements as a matter of priority, leading to some senior employees re-joining pension schemes, with significant numbers re-joining in the big open schemes i.e. NHS, Local Government, Civil service, USS. “
In terms of the MPAA, Waites adds: “For better paid employees, who might be entitled to contributions of more than £4k, accessing DC pots was often seen as a choice that they had exercised having been warned of the consequences (MPAA) by their pension provider. The increase in MPAA is welcome not least because older employees might be looking to plugs gaps in pension savings caused by factors such as financial turmoil in the investment markets or maybe periods of economic inactivity. Where employers are looking to tempt older workers back into the workforce to plug skills gaps a generous pension arrangement may well be attractive. However to avoid potential age discrimination issues it wouldn’t be appropriate to offer this only to older workers.
Jones-Tinsley says he would have preferred the MPAA to have been abolished as it would have benefited far more people than the LTA and would have been less likely to have been opposed by the Opposition.
Dargie strikes an optimistic note overall. He says: “Even before, the Chancellor’s announcement, changes in pensions legislation made it difficult for many to make definite plans for retirement. Ironically, when the Lifetime Allowance was first introduced, it was set for the first five years, which provided some short-term certainty back then.
“Everyone is told seek financial advice. The disappearance of the Lifetime Allowance should make conversations with Pension Wise or an IFA easier. A likely outcome is that those who can afford to do so will increase their contributions up to the new Annual Allowance. This could be useful for anyone affected by the 2023/24 reduction in the threshold for additional rate income tax by taking advantage of salary sacrifice.”
However, he suggests that the increased annual allowance will reduce the need for employers to offer alternative savings vehicles, such as a workplace ISA, alongside their pension scheme.
Hymans Robertson’s analysis of what the impact of the changes could be
We expect that it will result in higher earners who were previously impacted by restrictions on tax relief re-engaging with pension saving and increasing the amount that they save. For some there is an opportunity to materially increase the amount they pay into pension and therefore the amount of tax they can save.
Individuals with an Adjusted Income of £312k in 2022/3 had an AA of just £4k. If they contributed £4k to their pension they would have got tax relief of £1,800. If they have the same level of Adjusted Income in 2023/4 their AA will be £34k – so they can get tax relief on an extra £30k of pension contributions resulting in an additional tax saving of £13,500.
Individuals who had stopped saving into pension because of concerns about incurring LTA tax charges will be able to re-start pension saving and get tax relief on contributions of up to £60k.
An individual who has income of £200k who decides to pay £60k into their pension will get tax relief of £27k. This all means that saving into pension is likely to be more attractive to all but the highest earners than it has been since the government first started reducing the AA and LTA in 2011.