Finance Bill: pension changes – issues for individuals and employers
The Budget announced significant changes to the limits on tax relieved pension savings in registered pension schemes – here’s the detail.
Finance Bill: pension saving limit changes
Significant changes to the limits on tax free pension savings were announced at the Budget. Publication of the Finance Bill has added some detail to how these will operate. Whilst the relevant provisions could be amended as the Bill moves through Parliament, we expect them to be enacted in substantially their current form. Individuals with significant savings in registered pension schemes and relevant pension protections should consider these clauses in detail and determine how they might affect them personally. Employers should consider the potential impact on pension provision as part of their total employee reward offering.
Key Budget announcements
As announced at the Budget, from 6 April 2023 the standard annual allowance will increase to £60,000 (currently £40,000). Individuals will still be able to carry forward any unutilised annual allowance from the previous three tax years. The ‘adjusted income’ threshold for annual allowance tapering will increase to £260,000 (currently £240,000) and the minimum tapered annual allowance will increase to £10,000 (currently £4,000). This means that individuals with annual adjusted income of £360,000 or more will have an annual allowance of £10,000 from 6 April 2023.
The money purchase annual allowance will also increase to £10,000 to encourage individuals who are currently drawing a pension to remain in work. Additionally, no liability to the lifetime allowance charge will arise from 6 April 2023, and the lifetime allowance itself will be abolished at a future date. However, for individuals without relevant pension protections, the maximum tax-free lump sum will be capped at 25 percent of the current lifetime allowance (i.e. £268,275) and maintained at that level.
Key points from the Finance Bill
The Finance Bill added the following details to the Budget’s headline announcements:
- The income threshold for annual allowance tapering will remain at £200,000;
- From 6 April 2023, individuals who hold relevant enhanced or fixed pension protections will be entitled to a tax-free lump sum which is higher than the standard £268,275 limit;
- These individuals will be able to restart contributions to registered pension schemes, or join a new scheme, without invalidating those protections, subject to detailed conditions requiring tax advice;
- Pension schemes must continue lifetime allowance benefit testing and crystallisation event reporting so that the relevant tax-free lump sum cap can be applied; and
- From 6 April 2023 certain lump sums paid by registered pension schemes (e.g. defined benefits lump sum death benefits and uncrystallised funds lump sum death benefits) will be taxed at the individual’s marginal income tax rate if, previously, they would have been subject to a lifetime allowance charge.
What could potentially affected individuals consider?
Key points for individuals with significant registered pension scheme savings and relevant protections to consider include:
- As the annual allowance will increase, unutilised annual allowance can still be carried forward, and a lifetime allowance charge will no longer apply. Enhanced pension contributions by individuals who are able to claim associated income tax relief might have a role in inheritance tax planning, assuming that registered pension savings remain outside the estate for inheritance tax purposes (though in many cases beneficiaries of post-death distributions from pension schemes will be subject to income tax at their marginal rate);
- As savings will no longer be subject to a lifetime allowance charge at 75 years of age (or on the member’s death before that age), registered pension scheme members might consider delaying taking benefits (or, in some cases, might not take lifetime distributions at all – see above);
- Those with UK tax relieved savings in international pension plans where the annual and lifetime allowances apply (e.g. inbounds currently in the UK or those with legacy pension plans based overseas from periods of UK working) who are considering pension consolidation or approaching retirement should consider personal advice to confirm their specific UK tax positions; and
- The tax treatment of pensions can – and does – change, which presents challenges for longer term retirement planning. Can any planning implemented in response to current pension reforms easily be changed or reversed should a future Government potentially re-introduce a lifetime allowance?
What should employers think about?
Pension provision is a key part of the employee value proposition. To ensure that pension arrangements continue to deliver the maximum value to businesses and their employees, employers should consider:
- How they can best communicate these changes to employees so they understand their pension’s position in their total reward package;
- What changes might be made to the total reward package to maximise tax-free pension savings under the increased annual allowance (e.g. offering employees the opportunity to increase pension contributions flexibly from April 2023, such as through sacrificing salary or bonus) – and whether it would be appropriate to review flexible benefit and salary sacrifice offerings more broadly as part of a general refresh of the employee reward package;
- Changes to any cash alternative to pensions offered to higher earners who are subject to the tapered annual allowance – these will need to be revisited in light of the increases to the adjusted income threshold and minimum tapered amount; and
- Whether employee group life cover arrangements remain appropriate given certain lump sum death benefits, which would previously have been subject to a lifetime allowance charge, will be subject to income tax at marginal rates from 6 April 2023 (see our article on relevant issues under the current pension regime). In particular, employers may wish to consider or continue the use of an Excepted Group Life Policy (or ‘EGLP’) to provide death in service benefits.
What happens now?
Other practical points to consider, which should be read in the context of the details in the Finance Bill, are set out in our earlier Budget article. Though these provisions might be amended during the Finance Bill’s passage through Parliament, we expect them to be enacted in substantially their current form.
Please contact the authors, or your usual KPMG contact, if you would like to talk through what these changes mean for your pension arrangements.