Pensions and the Spring Budget 2023

It was an interesting Spring Budget as far as pensions were concerned and there were some notable highlights:

The Lifetime Allowance (LTA) will be removed from 6th April 2023 meaning that there won’t be a Lifetime Allowance Charge when clients access their funds.
Tax free cash will be capped at 25% of the existing LTA i.e. 25% of £1,073,100 = £268,275.
Where there is a form of LTA protection in place, this could be relevant where tax free cash entitlement is in excess of £268,275.
The Annual Allowance is set to increase from £40,000 to £60,000.
The Money Purchase Annual Allowance (MPAA) and the minimum Tapered Annual Allowance will increase to £10,000.

What Does this Mean for Clients?

The Chancellor’s announcements means that pensions continue to be an attractive tax-efficient savings vehicle for the following reasons:

Pension contributions for high earners will be particularly attractive especially for those who will be subject to Additional Rate Tax when the threshold drops from £150,000 to £125,140 in 2023/24.
For those subject to the MPAA and the Tapered Annual Allowance, they can contribute more to their pensions.
The removal and scrapping of the LTA will enable clients to build up a significant pension fund from which they can draw a tax free lump sum and an income to meet their income needs in retirement.
For those who can rely on non-pensions wealth to provide an income in retirement, pensions will become an increasingly attractive way to pass wealth to future generations as they sit out of a client’s estate from an IHT perspective.

A Sting in the Tail?

Saving for retirement requires long-term planning and so clients and their advisers need to have confidence that pension rules won’t keep changing as this makes planning incredibly difficult.

We now know that the Labour party have announced that they will reinstate the LTA if they win the next general election and instead introduce measures to specifically target doctors.

My view is that if the government caps the amount of money that can be paid into a pension, it shouldn’t also cap the size of the pension fund when money is taken out so I am in favour of the scrapping of the LTA. I very much hope that pensions don’t become a political issue as this could undermine efforts to encourage people to save for their retirement.

Summary

We will be discussing with our clients how the changes in pension rules will affect them and their financial plans.

If you would like to discuss your retirement planning, please do get in touch.