Guidance

Spring Budget 2023: a GAD technical bulletin

Published 17 March 2023

Introduction

The Chancellor of the Exchequer presented his Spring Budget 2023 to Parliament on 15 March. He set out plans to deliver on 3 of the Prime Minister’s 5 key priorities: to halve inflation, grow the economy and get debt falling. This bulletin focuses on announcements affecting pensions taxation, pension fund investment and retirement planning.

Long term sustainable growth

The Chancellor’s strategy to deliver long term sustainable growth is focused on four pillars: Employment, Education, Enterprise and Everywhere (as signposted in a speech earlier this year). The Employment pillar aims to increase the labour supply and support people to move into employment. There is a particular emphasis in the Spring Budget on encouraging workers aged over 50 to extend their working lives. In his Budget speech the Chancellor said there are 3.5 million over-50s who are of pre-retirement age and not part of the labour force. This figure has increased by 320,000 since before the pandemic.

Pensions tax reform

To support these ‘Employment’ aims the Chancellor announced significant pensions tax reforms, saying that “no one should be pushed out of the workforce for tax reasons.”

Currently, there are limits placed on the total tax-relieved pension savings an individual can make each year and over their lifetime. These include the:

• Lifetime Allowance (LTA) which is the maximum amount of tax relievable pension savings an individual can benefit from over the course of their lifetime.
• Annual Allowance (AA) which is the maximum amount of pensions savings an individual can make each year with tax relief. A taper applies for people with income above set levels.
• Money Purchase Annual Allowance (MPAA) which is a reduction to the AA for individuals who have flexibly accessed their money purchase pension savings.

The LTA and AA mainly affect higher paid and/or longer serving individuals. The proposed reforms to these limits - which we summarise below - will help ensure that high skilled individuals, such as NHS clinicians, are not disincentivised from remaining in the workforce. HMRC’s latest newsletter provides further details.

Lifetime Allowance

The LTA was introduced in 2006 and has been maintained at £1,073,100 since April 2020. Individuals may contribute to their pension(s) over this limit, but they will be subject to a tax charge on the amount above the LTA. The excess is taxed either at 55% where benefits are taken as a lump sum, or at 25% where taken as pension.

Spring Budget 2023 announced that the LTA charge will be removed from April 2023, before the LTA is abolished entirely from April 2024 (legislated for in a future Finance Bill). Lump sums above the LTA will, in future, typically be taxed at an individual’s marginal rate of income tax.

Individuals may be able to receive a tax-free lump sum when they become entitled to their pension benefits - a Pension Commencement Lump Sum (PCLS). Currently the maximum PCLS is typically 25% of the capital value of the benefits coming into payment, or 25% of the LTA if lower.

Spring Budget 2023 sets a PCLS upper monetary cap of £268,275, which is 25% of the current LTA. This cap will take effect on 6 April 2023 and be frozen thereafter.

Some individuals may hold protected rights to a higher LTA or PCLS due to past tax planning decisions. Exceptions to these reforms will apply to individuals who hold valid LTA or PCLS protection.

Annual Allowance

The AA was also introduced in 2006 and has been maintained at £40,000 a year since April 2014. Spring Budget 2023 announced that the government will increase the AA to £60,000 from April 2023.

The Chancellor also announced a change affecting most public service pension schemes. Open and closed (legacy) schemes for a given workforce will be considered linked for the purposes of calculating AA charges. This means that any negative real growth in the value of benefits in the legacy scheme can be offset for the purposes of the overall AA calculation. This will be legislated for through secondary legislation and will apply from April 2023.

First introduced with effect from April 2016, individuals with high incomes are subject to a Tapered Annual Allowance (TAA). Currently an individual’s AA is reduced by £1 for every £2 increase in ‘adjusted income’, down to a minimum AA of £4,000. The Chancellor announced this minimum reduced AA would increase to £10,000 from April 2023. The adjusted income level required for the TAA to apply will increase in April 2023 from £240,000 to £260,000.

Spring Budget 2023 also announced that the MPAA will be increased from £4,000 to £10,000 from April 2023. The MPAA is lower than the AA to prevent individuals ‘recycling’ their money purchase pension savings, potentially benefitting from tax relief more than once.

Pension fund investment

Spring Budget 2023 sets out how the government will support high growth sectors of the economy, for example by encouraging investment and smarter regulation.

The Chancellor wants to encourage defined contribution (DC) pension schemes to invest in the UK’s innovative firms, stating this will also bolster retirement incomes.

The government will work closely with industry and regulators to bring forward a package of measures by the autumn, but Spring Budget sets out some initial measures:

• At least £3 billion will be invested in the British Patient Capital programme, which will be extended for a further 10 years.
• The Department for Business and Trade is requesting feedback on a new Long-term Investment for Technology and Science (LIFTS) initiative. This aims to establish new investment vehicles tailored to the needs of UK DC pension schemes.

The government will shortly consult on pursuing an accelerated transfer of the £364 billion Local Government Pension Scheme (LGPS) assets into pools, proposing all listed assets are pooled by March 2025. This is intended to support increased investment in innovative companies and other productive assets.

The government will also consult on requiring LGPS funds to consider investment opportunities in illiquid, long-term productive assets such as venture and growth capital.

Midlife MOTs

Finally, the government will expand and improve midlife MOT tools to support individuals with planning for later life across Great Britain.

The midlife MOT offers free support to encourage people in their 40s, 50s and 60s to make more active planning in the key areas of work, wellbeing and money.

The government will work with employers and pension providers to encourage signposting to the midlife MOT and related support.

Next steps

If you’d like to discuss topics in this bulletin or to learn more about the potential impact of other Spring Budget 2023 announcements, get in touch with your usual GAD contact.