Major Pension Tax Reforms Budget 2023

We have summarised the extensive alterations to the personal tax regime for pensions announced by the Chancellor of the Exchequer, Jeremy Hunt. The goal is to keep skilled professionals, such as senior NHS doctors and consultants, in the workforce and encourage early retirees to return to work. However, the effectiveness of these measures has been questioned. This post provides an overview of the key announcements and their impact on employers, trustees, and individuals.

Key changes include:

1. Annual Allowance (AA): The cap on tax-free annual pension contributions will rise from £40,000 to £60,000 per year starting 6 April 2023.
2. Money Purchase Annual Allowance (MPAA): The cap on tax-free contributions to defined contribution pensions after flexible access will increase from £4,000 to £10,000 per year starting 6 April 2023.
3. Tapers Annual Allowance (TAA): The minimum TAA will increase from £4,000 to £10,000 per year starting 6 April 2023, and the adjusted income threshold will rise from £240,000 to £260,000.
4. Lifetime Allowance (LTA): The LTA charge will be removed from 6 April 2023, with the LTA entirely abolished in a future Finance Bill.
5. Pensions Commencement Lump Sum (PCLS): The maximum PCLS will remain at 25% of the current LTA (£268,275) and be frozen afterwards. 
   

Effects on individuals: Critics argue that these changes mostly benefit high earners. Although they will not impact the majority of pension savers with lower and middle incomes, affected individuals can contribute to their pension pots without worrying about a future LTA charge and may even postpone retirement. However, the MPAA and TAA changes still limit the pension contributions of high earners, and the PCLS limit will be eroded by inflation over time. Political uncertainty also affects the potential impact of these announcements. Labour leaders have pledged to reverse the LTA changes if they win the upcoming general election, making pension planning difficult for affected individuals.

Effects on employers and trustees: Retail pension providers, sponsoring employers, and occupational pension scheme trustees must ensure that their scheme rules reflect the reforms, adjust their processes accordingly, and stay informed about evolving requirements. Members will also need updated information and guidance to understand how these changes impact their pensions.

The Chancellor’s reforms may simplify specific processes, such as GMP equalization and correcting historic administrative issues, especially in de-risking exercises like buy-ins and buy-outs. However, many unanswered questions still need to be answered, and individuals need reliable, consistent rules for effective long-term financial planning. The details of these changes will become more apparent in future Finance Bills and after the next general election. Consult our tax expert for update about recent changes and how we can save you tax.