Hello Budget afficionados…here’s some commentary and examples of the pension and tax implications of the budget which can massively affect your financial planning, along with some top tips on how to maximise their effects.
So, all the speculation about a slight bump to the Lifetime Allowance, then a big increase to £1.8m and suddenly out of nowhere….it gets abolished entirely. Whoa!
The detail is still fresh but from 6th April 2023, no LTA tax charge will be levied on pensions. That’s right. NO LTA TAX CHARGE…Better get people with large enough DB schemes or low enough remaining allowances to delay access in the short term. I imagine a few schemes may be inundated with delay requests these next few weeks.
Spoiler Alert however…Before you go and completely disregard the Lifetime Allowance and all the forms of protection though, entitlement to a PCLS is now frozen at 25% of the current allowance (£268,250), 25% of the remaining Lifetime Allowance or 25% of any protected/uplifted Lifetime Allowance.
This is a valid consideration for those with previous forms of Fixed Protection who have been locked out of contributing. We also know that invalidating Fixed Protection (2012, 2014 or 2016) by contributing does not invalidate the PCLS associated with that protection. So Fixed Protection 2012, which gives you £450,000 of PCLS (£1.8m x 25%), can be invalidated by contributions with the individual retaining this £450,000 PCLS right. You will probably want to look closely at everyone you have with a form of FP in the coming months.
Onto death benefits, the existing pension is that most forms of lump sums are tax-free within the LTA and taxable at 55% on the excess, if death is before age 75, and taxable at 55% if death is after age 75.
It appears from the initial Government notes that the LTA needs to be initially maintained for death benefit purposes. So before 75 any lump sums up to the LTA remain tax-free but amounts above this are taxed at marginal rates. After 75, any lump sums that would have attracted a 55% charge revert to marginal rate. These do not appear to affect funds designated as income, only lump sums (typically death in service benefits, DB lump sums or other lump sum payments).
The initial detail is that the Lifetime Allowance will be removed entirely by a future finance bill. It’s unclear at this stage what this means for the PCLS and how it will be referenced or tracked. This probably creates more uncertainty than anything else for those with higher PCLS entitlements. There are likewise some uncertainties for how death benefits might be treated in the future without the LTA reference point for lump sums.
Annual Allowance, Tapered Annual Allowance and Money Purchase Annual Allowance
Accompanying the Lifetime Allowance news is the 50% increase in the annual allowance to £60,000. This is a big help for those accruing in DB schemes (cough NHS cough) who have no way of controlling the input and it also provides greater planning options for those contributing to DC schemes.
There’s now greater scope to bring earnings below £100k and reinstate the Personal Allowance. If we remember that the additional rate threshold is being reduced to £125,140, this gives people the chance to obtain even greater immediate tax relief, safe in the knowledge that there no lifetime allowance tax charge to weigh these contributions against. Combine contributions at these income levels with the cliff edge approach to losing tax-free childcare that applies at £100,000, and you have some serious tax relief available for certain people.
Alongside the increase in the annual allowance is the increase in the money purchase annual allowance (MPAA) and tapered annual allowance, both to £10,000. The increase in the MPAA (previously £4,000) improves the cost/benefit analysis of accessing a pension early, but there’s clearly now a bigger drop from £60k to £10k than from £40k to £4k to consider.
Accompanying the rise in the tapered allowance is a rise in the starting income point, from £240,000 to £260,000. This now sets the range from £260,000 to £360,000 before the maximum reduction to £10,000 applies. Based on the current allowances, someone earning £320,000 can personally contribute £60k gross and completely avoid any tapering without any carry forward needed. We’ve clearly come a long way since the days of the tapering applying at £150k.
You will have to continue to bear with the previous years’ regime when working out any carry forward entitlement for a few more years yet.
Top tip: run a couple of templates and your documentation side by side, for pre tax year and post tax year advice to ensure you always have the correct calculations and figures on hand depending on when your advice was provided. It’s also worth noting, for those doing exams, we’re still working on old figures for those and are likely to be, for a few months yet.
Previous but relevant changes
It feels like it was longer ago than November 2022, but as a reminder we have changes to the Capital Gains Tax (CGT) exemption, the Dividend Allowance and freezes to the tax bands (except the additional rate band) and IHT thresholds that are all still going ahead from 6th April 2023.
Don’t let the excitement of the Lifetime Allowance stop you from making use of the CGT exemptions while they are still as high as they currently are.
It’s clear that the reduction in CGT exemption and reduction in dividend allowance are going to make GIAs incur more ‘natural’ tax. With the big increases in pension options, it feels like bed & pension is more on the cards than ever before.
Indeed, you might also be able to start making more of an argument for moving ISAs to pensions considering the untouched IHT benefits, and death benefit regime associated with pensions. Crazy times we’re living in.
There’s a lot to immediately digest so why don’t you take stock of it all and join our Tax Planning Opportunities session on 19th April and hear about all the new tax year opportunities you and your clients can consider going forward.