The Budget – ‘The sky’s the limit’

It had to happen eventually. As personal finance professionals we have looked on from the sidelines as successive global and national events have, seemingly, drawn the attention of Westminster away from our corner of the world.

It is hard to believe that the last significant changes to pension rules took effect in April 2017. Since then, Brexit, Covid (and its economic fall outs), successive government scandals and war in Ukraine have all conspired to discourage any further tinkering. This is something that we have always welcomed. It stands to reason that a stable and consistent set of regulations are vital to ensure confidence in pensions as a long-term savings vehicle.

As a result of the now-traditional series of orchestrated leaks in the days leading up to the Chancellor’s Budget speech yesterday, revisions to both the annual and lifetime limits for pensions were widely anticipated. Suffice to say, we imagine that very few had anticipated the bombshell of a complete abolition of the Lifetime Allowance (LTA).

Born out of the A-Day pension simplification rules introduced on 6^th April 2006, this so-called “lifetime limit” for pensions was brought in as a fundamental change in tack from the previous set of rules, which had emphasised yearly contribution limits but with no restrictions on the lifetime pot.

For the first few years after its introduction in 2006 the LTA benefitted from steady annual increases up to a peak of £1.8m. Amendments in subsequent years saw this limit steadily eroded, in tandem with the introduction of much reduced yearly limits – leaving us with the paradoxical situation we have today in which both annual contributions and the total lifetime pot being subject to restrictions and tax penalties.

From this perspective, scrapping the LTA feels like a rare victory for common sense. Restricting both the total pot size and annual payments has always seemed unfair, and the rules have now come in firmly in favour of the latter. For your pension pot at least, the sky is now the limit.

Of course, planning around the LTA, and the attaching tax charges, has become a cornerstone of pension planning over the past 17 years. The official budget report remains thin on detail, but there sadly seems to be no respite for anyone who has already had their benefits tested against the LTA or, indeed, paid tax charges as a result. Those who have already taken their pension benefits should, however, still benefit from these changes through the removal of the “age 75” final LTA test.

Closer examination of the official statements reveals that the LTA will continue to live on, albeit in a limited form. Although LTA tax charges will cease to apply with effect from 6^th April 2023, the maximum tax-free cash you may take from your pension fund will be fixed at 25% of the current LTA, equivalent to £268,275. This seems to be defined as a fixed monetary amount, and our inner cynic suggests that any future increases to this figure may be few and far between.

Pension investors who already benefit from a protected lifetime allowance above the current £1.07m limit, should still be able to take 25% of their protected allowance as a tax-free sum. This means that if you have existing LTA protection, this will continue to be valuable and you should take care not to inadvertently breach this protection, for example by automatic enrolment into a workplace pension.

For others where the spectre of the lifetime limit has caused them to put pension payments on hold, these measures will put pension planning firmly back on the agenda. As ever, the devil is in the detail, and we will eagerly await further clarity on how these policies will be implemented going forward, and the need to take expert and personalised advice remains paramount.

The Chancellor put significant emphasis on how this measure would help alleviate the exodus of senior clinicians from the NHS due to the impact of punitive tax charges resulting from their membership of the NHS pension scheme. Put simply, removing the lifetime limit may not be as effective in this regard as it seems, as most of these problematic tax charges actually stem from exceeding the annual contribution limits instead.

On this note, there will be a very welcome increase in the pension annual allowance (or AA) from £40,000 to £60,000 with effect from 6^th April.

The tapering rules, which reduce the AA available to higher earners, will continue to apply but with the annual earnings threshold (at which tapering starts to take effect) being uplifted from £240,000 to £260,000. From a planning perspective, anyone with a total income above the current threshold of £240,000 should benefit from an increase in their annual allowance because of the upcoming changes. Alongside this change there will also be an increase in the minimum AA, after any tapering, back to the previous level of £10,000.

The money purchase annual allowance (MPAA), which applies to those who have previously accessed taxable income from their pension fund, will also revert to the previous £10,000 limit, ostensibly also as part of measures to encourage over-50s to remain in the workforce.

Following the chaos of 2022’s September mini-Budget and subsequent follow-up statement in November, we were reassured to note that the tax rates, tax-free allowances and thresholds applicable to income tax, National Insurance or capital gains tax, will all remain as previously announced in the last Autumn statement. The inheritance tax threshold (£325k) and ISA allowance (£20k) will also remain unchanged.

With the current high inflation environment now trickling through into annual pay rises, a policy of continuing with the previously announced freezes in the personal allowance and other tax threshold will inevitably result in most of us suffering an increased tax burden – a phenomenon that economists refer to as “fiscal drag”. On this note, the Office for Budget Responsibility estimates that by 2027/28 the freeze in allowances will bring c.3.2m people into paying basic rate tax, and a further 2.1m into the higher rate band. With us now being closer to the next general election than the last one, it will be interesting to observe whether this policy will be maintained over the long term.

Other areas of interest included an extension of the government’s energy price guarantee (EPG) scheme, effectively capping the average household energy bill at £2,500 for a further three months (April – June) should be broadly welcomed. With wholesale gas prices seemingly on the decline, the OFGEM price cap will remain under scrutiny as we enter the warmer months.

A significant expansion in the scope of the 30 hours free childcare scheme for working parents of preschool children is also on the horizon from April 2024, on a phased basis, and will eventually see support for working parents beginning at 9 months of age rather than the current 3 years.

Although further details remain scarce at this stage, it is reasonable to assume that the same eligibility criteria as the existing 30 hour scheme will apply. Importantly, eligibility is subject to a cap of £100,000 “adjusted net income” for either parent. For those with an income just above this level, the opportunity remains to use pension payments, and the newly-increased allowances to reduce your effective income below the threshold, and we suggest that you discuss this with your financial planner, if appropriate.

Early in his speech, the Chancellor took the opportunity to further bolster his support of the Bank of England’s independent monetary policy committee, and its remit to control inflation. There was a reassuring reduction in forecasted inflation to c.2.9% by Q4 2023, but one would need to be brave to anticipate any kind of reduction in interest rates in the short term.

Those who prefer to immerse themselves in the details can find further information on HM Treasury’s website using the following link:

https://www.gov.uk/government/publications/spring-budget-2023