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Spring Budget Breakdown for Employers: Changes to pensions
Although much of the detail within the Spring Budget was expected, Chancellor Jeremy Hunt still left room for some eyebrow-raising surprises.
Anyone involved in HR, people management and employee benefits would have taken great interest in the announcements relating to pensions, childcare benefits, worker wellbeing and workplace inclusivity, for example.
In this series of articles, we reflect on the key changes announced by the Chancellor in March and assess their impact in relation to employee management and employee benefits. In this first piece we explore changes to pensions.
As anyone with responsibility for recruitment will know, businesses have been experiencing a sustained shortage of workers in recent years. The problem is particularly acute for certain industries, such as accommodation and food services, where shortages in late 2022 were experienced by more than a third of companies (36%).
A particular issue is the high numbers of workers aged over 50 becoming ‘economically inactive’. The government also faces a challenge in the NHS, where high-earning, highly skilled professionals are being disincentivised from staying in the workforce because of pension tax penalties. The Chancellor looked to address this in what has been labelled a ‘back to work’ budget.
What was announced
Headline changes announced by the government, taking effect on and after 6 April 2023:
- Annual Allowance
The maximum amount an individual can input to a registered pension scheme in a tax year and still receive tax relief was previously £40,000. The Chancellor announced this would be raised to £60,000. The ability to ‘carry forward’ unused allowances from the previous three tax years still applies.
- Lifetime Allowance
Where an individual’s total pension savings exceed the Lifetime Allowance (LTA), the excess was subject to a tax charge. The LTA reached £1.8m in 2011/2012 but has been frozen at £1,073,100 since 2020/2021. In the Spring Budget the Chancellor unexpectedly announced the LTA would be scrapped entirely.
- Money Purchase Annual Allowance
For defined contribution pensions, the Money Purchase Annual Allowance (MPAA) limits the amount of contributions you can make and still get tax relief after you have started taking money from your pension pot. This amount was raised by the Chancellor from £4,000 to £10,000.
- Tapered Annual Allowance
The adjusted income threshold for the tapered AA to apply has been increased from £240,000 to £260,000. For individuals who meet the income requirements, the AA is reduced by £1 for every £2 of adjusted income over this level to a maximum reduction of £50,000.
- Pension Commencement Lump Sum
Despite the scrapping of the LTA, the maximum an individual can claim as a PCLS has been limited to 25% of the current LTA (£268,275), except where protections apply.
What it means
The reforms have been largely welcomed by pensions experts, with many highlighting that they will encourage higher levels of pension saving without introducing significant burden on scheme administrators.
Employees who have accrued a substantial pension pot and have ceased making contributions might now wish to reconsider their position with the LTA having been scrapped. And for those who have already begun taking pension income, making additional contributions has now been made more appealing with the increase in the MPAA, which provides further headroom for tax-efficient saving to provide financial support in later life.
The abolition of the LTA is also expected to deliver knock-on benefits for group life assurance schemes. Commentators have pointed to the fact that benefits from such schemes, when combined with the value of pensions, are typically only free of tax up to the LTA. However, this would no longer apply when the LTA is removed.
While, overall, the reforms to pension policy have been met with positivity, some have also taken the opportunity to remind the Chancellor that financial incentives are only one part of a complex equation, and that they should be balanced with ongoing support from employers to keep workers engaged, fulfilled and content.
This article forms part of a series looking at the key changes announced by the Chancellor in the Spring Budget and they mean for those with responsibility for employee management and employee benefits schemes.
Please note that the information contained in this communication has been based on our understanding of the legislation and HMRC guidance at the time it was prepared, and this is subject to change.
None of this should be considered to be financial advice and we strongly recommend that you obtain advice from a regulated financial adviser that is specific to your personal circumstances before taking any action on any of the matters covered in this communication / website. No warranty, whether express or implied is given in relation to such information.
The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Corporate or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.
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