Lifetime Allowance – post budget update

The Chancellor’s recent budget statement has made my recent post on the Lifetime Allowance (LTA) somewhat obsolete. To help you understand what the pension changes mean for you, your scheme and SSASs in general, keep reading. 

What we expected

In his pre-budget statement, the chancellor stated that the LTA would be increased which would have been a welcome surprise by pension savers and SSAS providers.

What actually happened

Then, on budget day, the chancellor stood up and, in an unexpected announcement, he confirmed that the Lifetime Allowance would be abolished altogether. With the increase in the annual allowance, this is a game changer for pension savings.

An overview of the changes

The main budget changes for pensions are as follows:

• The LTA will be abolished.
• Tax-free lump sums payable on retirement will remain at £268,275 i.e. 25% of the current LTA (£1,073,100).
• The annual allowance (the amount some can pay into their private pensions before attracting tax) will be increased from £40,000 to £60,000.
• The money purchase annual allowance will be increased from £4,000 to £10,000.
• The adjusted earnings required for the tapered annual allowance to apply will be increased from £240,000 to £260,000.

LTA changes

The LTA was introduced in 2006 at a level of £1,500,000, it was increased to £1,800,000 and has since been gradually reduced to the current amount of £1,073,100.

From 6 April 2023 the LTA will remain at its current level and benefit crystallisation events (BCEs) at retirement, and when you reach age 75, will continue as normal. There will however be no LTA charge when you exceed 100% of your LTA.

The LTA will be abolished altogether from 6 April 2024.

Tax-free cash

Tax-free cash is the lump sum you receive when you take your retirement benefits.

Generally, this is 25% of the value of the fund. Although the LTA is being abolished this does not mean tax-free cash will be 25% of the fund value, no matter the size of the fund.

From 6 April 2023, the tax-free cash will be limited to 25% of the current LTA therefore £268,275 (25% of £1,073,100).

This does not apply if you already have protected tax-free cash, and this will remain, for example, if you have enhanced protection with lump sum protection or scheme specific protection. It should be noted though that if you have enhanced protection with lump sum protection, the amount of tax-free cash you can take will be restricted to the amount payable as of 5 April 2023,

Annual allowance changes

The annual allowance is the amount you can put into your private pension schemes (e.g. into your SSAS) before attracting tax charges.

Similar to the LTA, the annual allowance began in 2006 at a level of £215,000, was increased to £255,000 (hard to believe it was this high!) and then reduced to the current level of £40,000.

From 6 April 2023, the annual allowance will increase by 50% from £40,000 to £60,000.

Similar to the changes to the LTA, this is a welcome surprise for pension savers and SSAS providers.

Money purchase annual allowance

The money purchase annual allowance began in 2015 when pension freedoms came into play. It started at £10,000 and was reduced to £4,000 in 2017. As you can effectively take as much pension as you like from your money purchase scheme, it was introduced to discourage people from using their pension income to fund further pension contributions.

Various triggers affect the money purchase annual allowance e.g. when you first take income under flexible drawdown. If you would like further information on the money purchase annual allowance, get in touch.

From 6 April 2023, the money purchase annual allowance will be increased from £4,000 back to £10,000.

Tapered annual allowance changes

The tapered annual allowance began in 2020. It is complicated and affects you if you have an adjusted income of over £240,000 and a threshold income of over £200,000.

In these circumstances, your annual allowance gets reduced by £1 from every £2 you earn over £240,000, subject to a minimum amount of £4,000.

From 6 April 2023, the adjusted income requirement will be increased from £240,000 to £260,000 and the minimum amount will be increased from £4,000 to £10,000.

Existing protections and future contributions

For some who already have significant pension savings, they could protect their funds from the LTA on the basis they will not pay any further contributions to the private pension arrangements.

From 6 April 2023, anyone who holds a valid enhanced protection or any valid fixed protections, where this protection was applied for before 15 March 2023, and a certificate or reference number subsequently issued, will be able to pay contributions without losing this protection.

Why did the chancellor change the LTA?

The chancellor stated that ‘no one should be pushed out of the workforce for tax reasons’. As an example, there was little incentive for older skilled workers (skilled workers approaching retirement age??) such as doctors and senior NHS staff to keep on working when they reach an age and their pensions will be subject to big tax charges, hence encouraging them to retire and leave. The changes have therefore been introduced to try and encourage people to think twice before retiring early.

Is it good news?

For some individuals and SSAS providers, it is good news. It will encourage people to put more money away and build up their pension funds without attracting tax. SSASs are free from capital gains and inheritance tax so they are a good haven to build up, now unlimited funds, which can be passed down a generation without being subject to inheritance tax.

From another point of view the LTA currently stands at £1,073.100 so you do need to be well off to be affected, and, at a time when some are struggling financially, you can see why there is a view that this should not be a priority for the government.

There is also an argument that increasing/abolishing the allowances, could result in people retiring earlier as they have more potential to quickly build up their funds.

In summary

Budget day was eventful for SSAS providers. It should encourage people to save more and has generated debate on the UK pension system, how it works and how you benefit from it, which is a good thing.

I hope you have found this useful, if you would like more information on the LTA or budget implications and what this means to you, please contact me. I’d be delighted to hear from you.