A surprising budget for retirement saving

In recent years, the budget or autumn statements have rarely provided too much in the way of change for financial planners; allowances have been trimmed or frozen but the core environment in which we plan your finances has remained reasonably stale.  All that changed yesterday!

There had been rumours about increasing the amount you could save back into a pension once you are already retired (the so called Money Purchase Annual Allowance) to encourage those who retired early post pandemic back into work.  There was much talk about the need to do something to address the issue with NHS pensions for consultants and the odd rumour about increasing the Lifetime Allowance (“LTA” or the total amount you can accumulate into a pension before triggering a tax charge).  To the Chancellor’s credit rather than making the system more complicated, he has opted for tax simplification by completely abolishing the LTA.  No-one expected that!

Is it good news or bad?  We do confess to preferring a stable environment rather than this type of shock announcement so that people can plan for the long term with some degree of certainty, but broadly these changes are overwhelmingly positive to help people fund their retirement.

Most of the changes impact from 6^th April 2023 so there is no need for immediate action. For a specific group of clients there is however now an opportunity to use unused allowances from 2019/20 under the ‘carry forward’ rules before they are lost on the 6^th April.  If you have stopped contributing because of concerns about the LTA and would like us to check out whether this applies to you, please get in .

So what are the key changes?

The abolition of the Lifetime Allowance

The government will remove the Lifetime Allowance charge from 6 April 2023, before fully abolishing the Lifetime Allowance in a future Finance Bill. So effectively it no longer exists. This means that you can continue to save into your pension pot only constrained by the annual allowances.

For anyone who has stopped contributing for fear of breaching the allowance, pension contributions now come back into play.  For anyone approaching 75, you will no longer suffer an ‘LTA test’ and potential tax charge on your birthday – provided it is not before 6^th April 2023.  If you already had some form of fixed protection giving you a higher LTA, you can now contribute again.

There are two points to note on this change.

• Firstly, the amount you can take out as ‘tax free cash’ has been fixed at £268,275 being 25% of the current LTA. This will not increase or be inflation linked (until they change the rules again!) although if you have protected a higher amount that remains  All pension drawings above that amount will be subject to your marginal rate of tax, but of course have benefited from tax relief on the way in and tax free growth within the pension
• Secondly, it appears there has been no change in the inheritance tax rules so that the pension still remains outside your estate and can be passed on to beneficiaries tax-free (death before age 75) or drawn at their marginal rate of tax (death after age 75). This is incredibly generous and we can’t see it surviving future government changes so is something to be aware of as we plan longer term

Changes to the Annual Allowances

A number of changes mean that more people will be able to contribute more:

• The amount you can contribute each year and benefit from tax relief at your marginal rate increases from £40,000 to £60,000 from 6^th April
• If you are already retired and have drawn income from a Money Purchase pension, the amount you can contribute back into a pension each year and benefit from tax relief increases from £4,000 to £10,000
• Total earnings at which you start to lose the tax relief on pension contributions increases from £240,000 to £260,000 and tapers down to an annual allowance of £10,000 rather than £4,000

All these changes are effective from 6^th April 2023 and provides much opportunity to increase pension savings without the fear of some form of exit tax.

With the reduction in CGT allowances announced in the Autumn statement, it looked like the opportunities for tax efficient savings were reducing.  That all reversed yesterday.  The pension now comes back centre stage for pretty much everyone.  It is a level of generosity, and more notably directed towards higher earners, that is a real shift in direction and potentially hard to sustain without a significant up tick in economic growth.

Will this be the last change to the political football that is pension legislation? We seriously doubt it! Indeed the Shadow Chancellor, Rachel Reeves, stated on various media outlets this morning that Labour, if elected, will categorically reverse the changes, and reinstate the LTA.

But for the moment, it definitely offers planning opportunities which we look forward to discussing with you over the coming year.