What big pensions shake-up was announced in Spring Budget ’23?
During the spring budget 2023, Chancellor Jeremy Hunt announced the biggest shake-up to the pensions system since the freedoms in 2015. Here, we look at exactly what was announced and the crucial planning points to look out for. This will be key knowledge for anyone studying for their CII R04, J05, or AF7 pension papers, or the wider financial planning papers, R06 and AF5.
This article is correct as at 20 March 2023.
For a subject which is often considered stuffy and boring, pensions suddenly got rather interesting.
There had been rumours prior to the budget on Wednesday 15th March that changes could be coming. Orchestrated leaks suggested various forms of increase to the annual allowance and/or lifetime allowance were on the table. What virtually nobody expected was Jeremy Hunt to announce the complete abolition of the latter.
Why the change?
The lifetime allowance has been in existence since A-day in April 2006 when numerous prior pension regimes were consolidated into one. Unlike the annual allowance, it tests benefits at the time they are taken from a pension rather than when they are put in. Benefits which exceed the lifetime allowance (currently £1,073,100) are taxed at punitive rates of 55% if taken as a lump sum, or 25% if taken as income.
With a series of cuts since its 2011/12 peak of £1.8m, the allowance has halved in real terms over the last decade. As a result, this tax charge has become increasingly unpopular.
The conundrum the government faced related to senior public sector employees, particularly doctors, with defined benefit pensions. Anecdotal evidence suggested many such key workers were retiring early rather than incur punitive tax charges simply by virtue of their ongoing membership of their scheme.Read about the changes to pensions announced in the Spring Budget 2023 Click To Tweet
What’s changing and when?
The potential sting in the tail is that the lifetime allowance will not actually be abolished from the new tax year (6 April 2023). Instead, the rate of tax charged on lifetime allowance excess amounts will be set to zero, with abolition of the allowance to take effect from 6 April 2024.
What’s the difference, you may ask? The difference is subtle, but minimal in practice. The existence of the lifetime allowance is currently enshrined into law, having been created as part of the Finance Act 2004. To abolish it would therefore require new legislation to be passed through parliament.
Changes to tax legislation are usually passed as part of the Finance Act, which is generally once a year. This is a lengthy process, which involves the draft Finance Bill being produced, parliamentary debate and potential revisions. The final Act then needs to be passed through Parliament before receiving Royal Assent, which is sometimes only weeks before the new tax year begins. The Finance Act 2023 has already received Royal Assent and therefore cannot be altered further.
What the original legislation does allow, however, is that the Treasury may make an order so as to vary the rates of the lifetime allowance excess tax charge. This means that the Chancellor of the Exchequer may alter the rate of tax charged without further reference to Parliament, including changing it to zero. This is what Mr Hunt has done as a short-term measure, with the formal legislation to abolish the allowance to come later.
Opposition to the changes
The Labour party has already announced its opposition to the measure and has claimed it would reverse the move were it to win office.
But, the next general election does not need to be held until December 2024. It is perhaps unlikely in practice that Labour, were it to win office, would want the enormous administrative headache of seeking to reinstate the allowance if the changes have gone through. A possible alternative route is for pensions to be brought within the scope of the inheritance tax regime, as called for by the Institute for Fiscal Studies in December 2022 (see Death and taxes and pensions | Institute for Fiscal Studies (ifs.org.uk) for those who are interested).
The other main measures announced
- An increase in the annual allowance from £40,000 to £60,000;
- An increase in the money purchase annual allowance and the minimum tapered annual allowance from £4,000 to £10,000;
- The threshold for tapering of the annual allowance to start being increased from £240,000 to £260,000;
- The maximum pension commencement lump sum entitlement to be frozen at 25% of the current annual allowance effectively £268,275
It was subsequently confirmed by HMRC in Pension Schemes Newsletter 148 that scheme members who hold previous lifetime allowance protection will still be able to take an enhanced lump sum. This will generally be 25% of their protected amount.
Crucially, it was also confirmed that members who hold enhanced or fixed protection, from 6 April 2023, will be able to make further pension contributions without invalidating that protection.
How will this impact pension exams?
We have to assume that the exams will continue to include lifetime allowance questions until told otherwise. Therefore, candidates should continue to study this subject as part of their revision, though some of the learning may ultimately prove futile in practice.
If the changes do go ahead, it will have a significant impact on the technical content of the pension exams. So, for those candidates who have not yet booked their sitting, if opting to take one of the other exams earlier, and pushing the pension exam back, is an option, it might suddenly look more appealing.
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