Press release
15 March 2023
Rachel McEleney, associate tax director at Deloitte, said:
“The abolition of the lifetime allowance, outlined by the Chancellor today, will be welcomed by those with substantial undrawn pension savings. The Chancellor also announced that the standard annual allowance for pensions will be increased from £40,000 to £60,000 from 6 April 2023. The changes are intended to reduce high tax charges that can act as a disincentive for some higher earning workers to remain in the workforce.
“Similarly, there are nuances around timings and the workings of the lifetime allowance rules that could mean that some individuals might not benefit from the changes. For example, if they are subject to a lifetime allowance test on their 75th birthday before 6 April 2023.
“Overall, it is a significant simplification to the pension tax rules, though there may be some complexity in the transition. Anyone who is potentially affected by the changes should obtain appropriate financial and/or tax advice.
“The annual allowance limits the amount that can be saved tax-efficiently in an individual’s pension scheme each year. This is done by applying a tax charge to any excess over the allowance. Pension savings include contributions to money purchase schemes as well as accruals of additional pension rights in defined benefit schemes, which have a statutory method of valuation. The annual allowance is currently tapered by £1 for every £2 of income above £240,000. This is subject to a minimum allowance of £4,000 in 2022/23, which applies where income is £312,000 or more. Taper will continue to apply in 2023/24, but the threshold is increasing to £260,000 and the minimum allowance is increasing to £10,000. The minimum allowance will therefore apply to those with income of £360,000 or more.
“Additionally, the money purchase annual allowance is increasing from £4,000 to £10,000 from 6 April 2023. This allowance applies to individuals who have accessed pension income flexibly since 6 April 2011. It limits the amount that can be contributed to money purchase schemes and unused allowances may not be carried forward.
“The lifetime allowance currently limits the total value that an individual can accumulate in pension schemes tax efficiently in their lifetime. Where the aggregate value of benefits taken exceeds the lifetime allowance, a 55% charge applies if the excess is taken as a lump sum, or 25% otherwise (e.g. to provide additional pension income). If an individual were to take all of their benefits worth £2 million in 2022/23 the excess of £926,900 would be subject to a lifetime allowance charge of either £509,795 or £231,725, depending on whether the excess was taken as a lump sum or used to enhance pension income. This charge would no longer apply if the taking of benefits were deferred to 2023/24.
“The maximum tax-free lump sum that an individual can take when they start drawing their pension, is normally capped at 25% of the lifetime allowance (£268,275 in 2022/23). Although the lifetime allowance is being abolished, the £268,275 cap will continue to apply from 6 April 2023 unless certain protections are in place. For lifetime allowance purposes, the tax-free lump sum is normally tested when the individual starts drawing their pension. This includes designating pension funds for income drawdown, whether or not any withdrawals are made.”
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