Spring Budget 2023: pension allowances
15 March 2023
Much discussed in the days prior to the budget was the possibility of changes to pensions tax-free allowances. In a surprise to no one, these leaks came to fruition.
The Annual Allowance (AA) will therefore be increased by 50% from £40,000 per year to £60,000 per year.
Alongside this measure, it will ensure that each public sector pension scheme workforce (e.g. 1995, 2008 and 2015) are all treated as one arrangement for the purpose of calculating the pension input amount.
This will come into effect from April 2023.
Costing estimates value this at a £55 million cost to the Treasury, however, there is some uncertainty with this figure as there may be a large behavioural response as a result of the measure.
The Money Purchase Annual Allowance (MPAA) will also be increased from £4,000 to £10,000. This increases the amount an individual can contribute to a defined benefit (DB) scheme after the pension has been accessed flexibly.
Bigger news was the announcement that the Lifetime Allowance (LTA), rather than being increased, would be completely abolished. Currently set at £1,073,100 it will be removed from April 2023 and abolished in 2024 when the legislative framework allows.
However, the measure will also introduce a cap on the tax-free lump sum at 25% of £1,073,100 (£268,275). This ensures that the lump sum remains capped as to not cause undue detriment to the Treasury.
Similar to the AA, the LTA impact to the Treasury is uncertain as this will likely cause a shift in pension savings behaviours, estimated at £135 million in 2023 / 24.
These measures are broadly to encourage participation of over 50’s in the labour market without being hit with a tax bill when contributing further to a pension. With highly skilled workers hitting the allowance and voluntarily withdrawing from active engagement in work, this reduces tax revenues and potentially limits growth. With NHS doctors and consultants being a demographic affected, it is clear that retaining key workers is the main aim.
With these changes it may be more beneficial for workers to contribute more and salary sacrifice for higher earners will become even more beneficial.
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