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Hunt addresses impact of pensions allowances | accountingweb
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Hunt addresses impact of pensions allowances

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In response to the problems being faced in the NHS and elsewhere of pensions allowances perversely incentivising early retirement, Chancellor Hunt has made a number of changes in his Spring Budget.

15th Mar 2023
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For some time now, there has been widespread criticism of how pensions “allowances” have been relentlessly slashed in successive years. As I have reported on previous occasions, the impact of these allowances has, inter alia, led to many senior NHS staff either reducing the hours they are prepared to work for the NHS, or taking early retirement.

Chancellor Jeremy Hunt has chosen to reverse that trend.

Annual Allowance

The Annual Allowance (AA) is the amount by which an individual’s pension pot can increase in a year without triggering a tax charge at the marginal tax rate. 

For most “money purchase” schemes, it is straightforward to escape these charges, simply by reducing the amount of one’s contributions. For “final salary” schemes, however, some innocent and unavoidable behaviour (such as receiving a pay rise or even simply accruing an extra year’s entitlement) can end up being penalised. 

The Chancellor has raised the standard AA by 50%, from £40,000 to £60,000 from 6 April 2023. In addition, the tapering of the allowance for high earners will be relaxed: the income threshold at which taper commences is to rise from £240,000 to £260,000 and the minimum value for the tapered AA will now be £10,000 rather than the previous £4,000.

Under the existing system, an individual with an income of £312,000 or more would have an AA of just £4,000. From 6 April 2023 that same individual’s AA will be £60,000. At an income of £360,000 and above, the AA will be £10,000.

The money purchase annual allowance (for members in certain drawdown arrangements) will similarly rise from £4,000 to £10,000.

The ability to carry forward unutilised AA for three years will remain.

Lifetime Allowance

Currently, an individual is allowed to build up a lifetime pension pot up to the Lifetime Allowance (LA) without penalty; any excess over the LA at the time of retirement triggers a 55% tax charge.

At its highest, the LA had been £1.8m (remember, that’s in 2012 money, so nearer to £2.4m in today’s value), yet the LA for 2022/23 was only £1,073,100 – an amount previously slated to remain unchanged until 2026. This represents a decade’s trend of disincentivising substantial pension provision.

The Chancellor has abolished the Lifetime Allowance Charge with effect from 6 April 2023, enabling individuals to benefit from substantially larger pension savings without a 55% tax charge. The Lifetime Allowance itself will be abolished in a future Finance Bill.

The maximum amount that can be taken as a pension commencement lump sum (“tax-free cash”) will be frozen at its present level of £268,275 (25% of the current LA) going forward. Anything in excess of this will be taxed as income at the individual’s marginal rate.

Conclusion

The Chancellor stated that these changes were a direct response to the problems being faced in the NHS and elsewhere, with the allowances perversely incentivising early retirement. 

Gary Smith, Financial Planning Partner at wealth management firm Evelyn Partners, commented: “The absence of an LTA from April will return us to a state of affairs that existed until 2006 when the limit was introduced at the level of £1.5m before rising to £1.8m in 2011. The removal of the LTA marks a welcome and unexpected change of direction as the LTA had been reduced in recent years, and was scheduled to be frozen until 2026. 

This has also been a growing concern for holders of defined contribution pension pots, and while the numbers breaching the LTA were small, that is probably dwarfed by the numbers who have ceased to save into pensions before they reach the ceiling. As investment growth could take a pot above the LTA, not just the amounts contributed, that added further jeopardy for those who made good investment decisions.”

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Replies (7)

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By norstar
16th Mar 2023 09:56

Is it coincidence that the final salary pension of a Tory MP, retiring after being booted out at the next GE, would need to be about £1m to finance a £33k pa annuity?

But by scrapping this, said Tory MPs will be able to delay drawing the pension and keep funding SIPPs etc when the MP gig ends?

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Replying to norstar:
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By norstar
16th Mar 2023 12:54

I've just realised another coincidence! An MP accrues a full pension after 20yrs of service, at which point said pension pot could be approx £1m.

Jeremy Hunt completes 20 years services as an MP in 2025 - the year the next General Election has to be held by and where many Tory MPs might find themselves "retiring"...

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By philaccountant
16th Mar 2023 10:24

What Jeremy Hunt (or any other politician) says is the reason for a policy should never be repeated as if it is a fact.

The majority of people who will be benefitting from these new allowances will not be the doctors that are being used to push the policy. It will be bankers and other very highly paid / wealthy individuals in our society who don't need any more special treatment and who won't adjust their working arrangements by a single day because of this giveaway.

It's a straight up handout to some of the richest in society at a time when we are underpaying junior doctors, teachers, ambulance workers and many other "key workers" in society. The ones we all agreed five minutes ago were the lifeblood of the country but are now kicking in the teeth.

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Replying to philaccountant:
By Silver Birch Accts
16th Mar 2023 12:51

According to one news report I read, this will cost £800 million and benefit only a few thousand.
The use of Doctors was a smokescreen.

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Replying to Silver Birch Accts:
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By norstar
16th Mar 2023 12:56

Not only this, but the much vaunted policy of providing free childcare to get a million mothers into work has one sticky problem - we've actually lost 10,000 nursery places since 2015, in which time the UK population has increased by 2.5m. Where are all these nursery places coming from to provide 30 hours free childcare?!

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Replying to norstar:
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By spilly
17th Mar 2023 09:03

The childcare is only free for 38 weeks of the year ie: the same as school terms. A working parent therefore has to either fund the remaining weeks at the standard nursery rates or find a job that is flexible enough to be term-time only.

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By ecvej
21st Mar 2023 13:00

"Under the existing system, an individual with an income of £312,000 or more would have an AA of just £4,000. From 6 April 2023 that same individual’s AA will be £60,000."

Is the above right? I thought it worked as below:

£312k income - £260k tapering threshold = £52k
£52k / 2 = £26k reduction in AA

£60k allowance - £26k tapering = £34k AA

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