Measure
The Chancellor has announced that the pensions lifetime allowance (“LTA”) will be removed. No lifetime allowance charges are to apply from 6 April 2023 and the LTA is to be abolished from the statute completely in a future Finance Bill.
The LTA is currently £1,073,100 and was due to remain at this level until April 2026. LTA charges normally arise where the aggregate value of benefits taken exceeds this limit. The LTA charge is currently either 55% or 25% of the excess, depending on whether the excess is taken as a lump sum or in another form.
Most individuals are currently able to receive up to 25% of their pension benefits tax free, up to the amount of the LTA. This is called a Pension Commencement Lump Sum (‘PCLS’). The maximum amount which can be accessed in this way tax-free will remain frozen at 25% of the current LTA, resulting in a limit of £268,275. Higher PCLSs will be available for eligible individuals who have protections in place due to making elections following earlier reductions in the LTA.
The AA is the maximum amount of pension savings that can be made tax efficiently each tax year (i.e. with effective tax relief for contributions made). The Chancellor has announced that the AA will be increased from £40,000 to £60,000 from 6 April 2023. The adjusted income level at which the AA begins to be tapered down will increase from £240,000 to £260,000. A minimum AA applies where the AA is subject to tapering. This is currently £4,000 for those with adjusted incomes of £312,000 or more; this will increase to a minimum AA of £10,000 for those with adjusted incomes of £360,000 or more.
Adjusted income is, broadly, taxable income from all sources before deduction of the individual’s own pension contributions and after adding back employer contributions to money purchase schemes and accruals to defined benefit schemes.
Other details of how the AA applies, notably relating to threshold income below which the tapered AA cannot apply, and AA carry-forward rules, remain unchanged.
The Chancellor also announced that the MPAA will be increased from £4,000 to £10,000 from 6 April 2023. The MPAA can apply where individuals have already drawn from their pension, and continue to or resume making pension contributions. Contributions above the MPAA to a money purchase (defined contribution) scheme will attract a tax charge at the individual’s highest marginal rate.
The effective abolition of the pensions LTA will affect individuals who have (or expect to have) undrawn pension funds in UK registered pension schemes and certain overseas schemes, where the aggregate lifetime savings exceed £1.073m in value. It will also affect some individuals who are already drawing pension benefits but who may have future benefits that need to be tested against the LTA (e.g. individuals under age 75 who are in drawdown). There are nuances around timings and the workings of the lifetime allowance rules that could mean that some individuals will miss out on some or all of the benefit of the increase. For example, anyone who already crystallised benefits worth half of the prevailing lifetime allowance will only have half of the increased allowance available for future benefits, as the cumulation rule operates based on the proportion of allowance used rather than the value. The pension rules are complex, so anyone who is potentially affected by the changes should obtain appropriate financial and/or tax advice.
The increase of the pensions AA will affect individuals with annual income of more than £240,000 saving into a pension pot.
The MPAA increase will affect individuals who enter into flexible access arrangements to draw funds from their pension savings and who continue to make pension contributions.
The measures will take affect from 6 April 2023.
The changes are intended to reduce high tax charges that can act as a disincentive for experienced professionals to remain in the workforce, with the Chancellor’s comments notably including that the changes are meant to “incentivise our most experienced and productive workers to stay in work for longer” and that “no one should be pushed out of the workforce for tax reasons”.
The abolishment of the LTA will be a welcome change for those with already significant pension pots. It marks a significant change as it was due to be frozen at its current level of just over £1m until 2026.
The increase of the pensions AA will increase the amount which individuals are able to tax efficiently contribute to their pensions. This is a welcome increase for those who make high annual contributions to their pensions, though the AA is still significantly lower than the peak of £255,000 in 2010/11.
The previous £4,000 MPAA restricted the amount which people who have already started to draw their pension can save into their pension tax efficiently. The increase to £10,000 should make it more attractive for retirees to return to work, which aligns with the government’s goal of incentivising a cohort of people to resume employment.
The pension regime remains highly complex, having undergone numerous changes, and care is needed for those who have or who are making substantial savings, or who may be affected by the MPAA.