In the run-up to the Spring Budget, there were expectations that this could be the most significant budget for pensions since the freedom and choice reforms announced in the Budget 2014 – and the Chancellor certainly didn’t disappoint in that regard.
The announcements made by the Chancellor in the Spring Budget will have far-reaching implications for high earners. We break down the key announcements below and explain what they mean for employers and their workforce.
- Pension Annual Allowance will increase from £40k to £60k – the pension annual allowance (AA) is the total amount of money that can be paid into the pension in any tax year without the member/employee incurring a tax charge. This includes both Employer and Employee contributions. It was either £40,000 or 100% of total earnings – whichever is lower. But it’s now going up to a maximum of £60,000 on 6 April 2023.
- Tapered Annual Allowance will increase from £4k to £10k – certain higher earners may be impacted by a tapered annual allowance, which gradually reduces the amount you can save into a pension plan each tax year depending on your earnings. The Chancellor has now confirmed that the tapering won’t reduce the allowance to any lower than £10,000 (previously set to £4,000).
- Money Purchase Annual Allowance (MPAA) will increase from £4k to £10k – when an individual starts to drawdown or cash in the taxable part of their pension, MPAA is triggered. This means the individual will see their annual allowance reduced from £40,000 to £4,000 each tax year. The MPAA is now going up from £4,000 to £10,000 – making it easier for people to keep working and saving once they’ve started taking money from their pension.
- Lifetime allowance (LTA) will be removed entirely – LTA is the total savings you can build up in all your pensions in your lifetime. Previously, the LTA limit was set to £1,073,100. This meant those who exceeded this limit would be liable to a tax charge of up to 55% on the amount over the allowance. The Chancellor announced that the lifetime allowance would be removed completely, and no one would face a lifetime allowance tax charge from 6 April 2023.
An important consideration for employers
Each of these changes on their own would see many people positively impacted when it comes to pension savings:
- The Pensions Annual Allowance and Tapered Annual Allowance boost will benefit many higher-paid workers.
- The increase to the Money Purchase Annual Allowance will directly benefit many people who’ve had to dip into their pension due to the cost-of-living crisis whilst still working, allowing them to contribute more into their pension to refill their pension pot without fear of a tax charge.
- Abolishing the Lifetime Allowance opens doors to use pensions to pass on unlimited amounts of wealth, tax efficiently, to the next generation.
Employers will need to consider how the announcements could impact employee behaviour as they look to maximise the benefits of these changes and their employee benefits offerings. This could include (but is not limited to):
- dealing with re-enrolment requests
- managing employee requests to increase contributions, including ad hoc payments into their pension plans.
- reviewing life insurance arrangements
- reviewing benefits employers have offered to higher earners, particularly those higher earners previously impacted by the Lifetime and/or Annual Allowance.
As employees grapple with how to maximise savings in the new system, employers could benefit from greater support in balancing the opportunities and risks and ensuring their valued workforce have access to the support needed to understand the changes and its implications to get the best outcomes.
Need some help navigating these pension announcements?
Pensions can be complex; however, our business growth experts can support you and your employees.
For more information about unburdening your business from payroll and pension compliance visit our SMART Employment page and read more about supporting your employees’ financial wellbeing, emotional wellbeing and physical wellbeing.
Amrik Birdi, Pension Consultant at Growth Partners
Amrik has a wealth of knowledge in pensions having joined Growth Partners from KPMG where he was responsible for advising companies and trustees on independent DC provider procurement exercises, DC investment strategy review, DC pensions strategy review, automatic enrolment compliance, and meeting ongoing governance requirements. Amrik spent three years before this as a Pensions Guidance Specialist at Pensions Wise helping members understand their pension and retirement options, empowering them to take control of their retirement journey. With a Diploma in Regulated Financial Planning and Certificate in DC Governance, combined with a Degree in Economics, Amrik is a fully qualified pensions consultant and able to offer strategic support to our clients on their options for workplace pension schemes and auto-enrolment.