Spring budget and what it means to savers

Although most of the changes might be considered as targeting higher earners, the changes announced do a have a wider societal impact. For instance, some of the more punitive tax applications, like the Lifetime Allowance and the Tapered Annual Allowance, have over the past few years had the unintended consequences of putting pressure on essential services like the NHS. In order to avoid pension related tax bills, doctors and consultants have been restricting their hours or even retiring. So, the Government addressing this has a wider positive impact on us all. 

The changes laid out in yesterday’s budget bring pension savings back into the fore for many people who were either restricted to how much they could pay into their pension, if anything, or had already reached a pot size that was at or exceeded the Lifetime Allowance.  

As is normal with pension related changes, we are awaiting the detail but, in the meantime, we’re going to set out the changes announced and what this means to savers. 

Pensions Annual Allowance 

Just to recap, the annual allowance is the total amount that an individual can have paid into a pension scheme (total from employer and employee) and get tax relief. Any pension contributions paid in excess of the annual allowance are subject to a tax charge. 

From April, the annual allowance will increase from £40,000 to £60,000 which means that people can have more money paid into their pension which is good news, especially considering that the £40,000 level has been in place for the best part of 10 years! 

Although, this change might not be relevant to all employees, it will be good news for some and especially those closer to retirement who are looking to maximise their pension pots. 

Tapered Annual Allowance 

Despite the Annual Allowance increasing, the tapering for higher earners remains in place albeit the starting point (Adjusted Income) has been increased from April from £240,000 to £260,000. Basically, this means that affected employees will have their Annual Allowance reduced by £1 for every £2 of Adjusted Income above £260,000. But the minimum level has been increased from £4,000 to £10,000. 

The underlying detail still needs to be published (including any change to the Threshold Income level) but assuming there is no change to the way this actually works, the new tapering should work as follows (we’ll let you know if this changes): 

Employers who offer cash in lieu of contributions or pension redirect, might want to consider reviewing the salary level for eligibility and also the amount that’s automatically paid into the pension scheme. 

Many employers offer employees earning £200,000 plus the option to limit their overall pension contributions to £4,000. They might now want to consider raising the earnings eligibility level by £20,000 and the contribution limit to £10,000. 

In addition, you will want to communicate these changes to your employees. 

Lifetime Allowance 

This was by far the biggest rabbit pulled out of the proverbial hat! There were pre budget rumours that the limit would be increased but I don’t think anybody expected it to be abolished. 

Just to recap, the Lifetime Allowance is the amount that anyone can build up in their pension without incurring a punitive tax charge (called the Lifetime Allowance Charge) when they withdraw money, reach age 75, die or transfer their pension to an overseas pension scheme. The current allowance is £1.073m.  

Contrary to some press reports, the Lifetime Allowance will only be abolished from April 2024 within a future Finance Bill. However, from April this year the Lifetime Allowance Charge, will be scrapped. 

However, as always, the devil is in the detail and although the Lifetime Allowance is effectively removed the amount of tax-free cash that anyone can withdraw from their pension will be limited to 25% of the current Lifetime Allowance, meaning a monetary limit of £268,275. 

Whilst Government has already made it clear that those with existing pension protection will be entitled to a higher amount, what still needs to come out in the wash is whether or not this new limit will remain static, automatically linked to inflation or subject to ongoing review. 

Despite the limit on the maximum tax-free cash, this change is really good news and together with the changes to the Tapered Annual Allowance should stem the outflow of massively needed skills in essential services, like the NHS. 

Again, we await the finer details especially for those people who have some form of pension protection. Do they still lose their pension protection if they continue to pay into their pension? This is an important question due to the maximum tax-free cash. 

Also, do you as an employer now have to re-enroll those employees with pension protection back into the pension? 

As soon as these points and others are clarified, we will be able to provide more detail on actions required by employers. 

Money Purchase Annual Allowance 

The Money Purchase Allowance restricts pension contributions for people who have withdrawn money from their pension in certain circumstances. From April, this limit increases from £4,000 to £10,000, which is good news for those people who needed to take money from their pensions to help deal with the cost-of-living crisis. 

This gives them a better opportunity to rebuild their pension savings at some point in the future. 

Again, if you offer cash in lieu or pension redirect to affected members, you might want to review the eligibility point for this. 

Other Savings 

From April, the Capital Gains Tax exemption level for individuals reduces from £12,300 to £6,000 and then to £3,000 from April 2024.  

This means that people with less tax efficient savings and investments should seriously think about taking advantage of their £20,000 annual ISA allowance if they’re not already doing so.  

Overall, this has been one of the most interesting budgets for pensions in a long time and whilst we still believe that further change is needed to simplify an overly complex tax relief system, the announced changes are a very welcome start. 

Article by

NatWest Cushon