In the biggest change in UK pensions tax since 2006, the Chancellor of the Exchequer has announced the complete abolition of the pensions tax Lifetime Allowance (often called the LTA).
While speculation had suggested a substantial increase was planned, complete abolition was still a major surprise. Employers should always remember that in communicating about personal financial issues they can present information but should avoid doing anything that could be seen as giving advice. If you provide accredited financial advice as an employee benefit, look for your service provider to supply the materials your staff will want.
Looking at the burdens on those who provide and manage pension schemes, in our view the abolition of the LTA is a very welcome reform in terms of promoting an increase in pension saving and reducing the volume of complex rules. An annual allowance is enough of a control over tax abuse of pensions saving.
There is clearly a substantial opportunity to simplify a lot of the complex protections that have been needed in the past when LTA was reduced including various time-based protections. This reduction in complexity will be welcomed by scheme employers, trustees and, most importantly, pension savers themselves. Some employers may want to act – for instance allowing employees to re-join schemes which are otherwise closed if the employee only left because of LTA issues.
Not surprisingly, the abolition of the LTA does not remove the limit on tax free cash on retirement, the pension commencement lump sum, which has been broadly 25% of LTA, but which will be frozen at its current level of £268,275.
The Chancellor also announced a substantial increase in the pensions tax annual allowance (the AA) from £40,000 a year per person to £60,000 a year. Leaving aside the political decisions involved in taxation, in our view this increased scope for pension saving is very welcome. Like the abolition of the LTA this will encourage pension saving, which in itself is often re-invested in the UK economy. It should be quite a simple change to implement and is unlikely to have any transitional complexity.
The Spring Budget provides for an increase in the minimum tapered AA, which applies only to higher earners, from £4,000 to £10,000 and an increase in the level of annual earnings to which the tapering provisions apply (tapering the AA down from £60,000 to £10,000) from £240,000 to £260,000. Those changes also provide for greater pensions tax reliefs, albeit only for higher earners.
The money purchase AA is also increased from £4,000 to £10,000. Whilst providing for greater pensions tax relief than currently, this allowance is still not particularly generous. It greatly restricts the contributions savers can make who have drawn on their defined contribution pension savings. It treats defined contribution savers less favourably than members of defined benefit pension schemes who can flexibly retire and draw benefits whilst continuing to work, without having a specially reduced AA.Most of the above changes are to take effect from 6 April 2023. The LTA change takes effect in two steps – from April 2023 the tax charge for exceeding the allowance is reduced to nil; from April 2024 the LTA will be abolished in its entirety.
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