Written by JMW solicitors LLP
The Chancellor of the Exchequer, Jeremy Hunt, delivered his first budget on Wednesday 15thMarch. A number of changes to the way in which pension savings are taxed were much discussed in advance of the Budget, but the Chancellor went even further than expected in what has been reported as his “back to work” Budget.
Since 2006, the Lifetime Allowance (LTA) has governed the maximum value a person may accrue as pensions savings during their lifetime, without stringent tax penalties being incurred. Originally set at £1.5 million, in the last 17 years the level of the LTA has been set as high as £1.8 million and as low as £1.07 million, it’s value as recently as the morning of Budget Day.
Having been extensively trailed in the press as planning to raise the LTA to £1.8 million, the Chancellor surprised many by announcing that the LTA would be scrapped entirely. Thus, savers will, from April 2023, face no limit on the value of their pensions savings.
Recently this has been an issue seen as compelling many high earners, particularly senior doctors in the NHS Pension Scheme, to leave employment so as to avoid the value of their pensions savings rising above the LTA and subjecting them to a punitive tax charge of up to 25% of excess pension and up to 55% of excess lump sum.
It’s estimated that around two million people will benefit from the change to the LTA.
Equally well trailed in advance of the Budget was an increase to the limit of the Annual Allowance (AA).
The AA governs the maximum amount that a person’s pension savings are allowed to increase each year, either by contributions to a money purchase pension scheme or by additional accrual in a defined benefit pensions scheme, while still benefitting from the tax efficient savings regime.
Whilst, as with most pension issues, there are complications around the margins, the main principle is that where a person’s pension increases in value by more than the level of the AA in any one year, that person is liable to pay a punitive tax charge of up to 45% of the excess savings.
Initially set at £215,000 in 2006, the AA has since risen as high as £255,000, but from 2014 has been set at £40,000.
Again, this has largely been an issue for high earners, either by limiting the amount they can contribute to a money purchase pension scheme or by restricting the amount they may accrue in a defined benefit pension scheme, as such accruals are made by reference to earnings.
In his first Budget, the Chancellor announced that he will raise the AA from £40,000 to £60,000 with effect from April 2023. This, again, was extensively trailed and is seen as an incentive to certain tranches of the workforce to remain in employment and be allowed to accrue additional pension savings without falling foul of HMRC.
Money purchase annual allowance
Somewhat less prominence has been given to the issue of the Money Purchase Annual Allowance (MPAA) and its treatment by the Chancellor in his “back to work” Budget.
However, the level of the MPAA is likely an issue of relevance to many more people, and employers, as it relates to more modest pension savers in defined contribution pension arrangements, such as most auto-enrolment schemes. In addition, it is most likely to be impactful on those aged in their 50s and who have recently accessed their pension savings as a way to fund early retirement from the job market, but who may now be looking to return.
The MPAA is the restriction on the amount a member of a money purchase pension scheme may contribute annually to a pension arrangement once they have accessed their pension savings, without incurring a punitive tax charge.
Following the removal, in 2015, of restrictions to how money purchase scheme savers could access their retirement funds, members have been allowed to take lump sums from their scheme, or take retirement income, but still contribute to those schemes and continue to build up retirement savings. That meant that many people accessed part of their pension savings, perhaps to pay off a mortgage or to pay for children’s education, while still continuing to work and save for their retirement.
Until 2017, such savers were able to do so as the MPAA was set at £10,000 per year. That was changed in the 2017 Budget to £4,000, significantly restricting the amount a person could save for retirement once they had accessed part of their retirement savings, without triggering a charge of up to 45% of the excess contributions.
Following the change announced today by the Chancellor, the MPAA will again be set at £10,000 with effect from April 2023. This has been seen as a positive move to attract back to the workplace many of those who have become economically inactive since the Covid 19 pandemic, in what is sometimes referred to as “The Great Resignation”.
For more information contact Julian Richards, Partner at JMW, on 0161 527 5108 or firstname.lastname@example.org