Out Of The Ashes

In the Spring Budget on 15 March 2023 key changes to pension allowances were announced. The changes relating to the 2023/24 tax year were confirmed in the Finance (No.2) Bill published on 23 March 2023.

This post summarises the key changes to the:

• Annual Allowance

• Money Purchase Annual Allowance

• Tapered Annual Allowance

• Lifetime Allowance 2023/24

• Lifetime Allowance 2024/25 onwards

• Pension Commencement Lump Sum

• Protection

Key Changes

​From 6 April 2023

​Annual Allowance increases from £40,000 to £60,000.

Money Purchase Annual Allowance increases from £4,000 to £10,000.

Tapered Annual Allowance adjusted income limit increases from £240,000 to £260,000 and the allowance cannot be reduced to be less then £10,000 (up from £4,000).

The Lifetime Allowance Charge is removed.

Anyone who held Enhanced or any of the Fixed Protections before 15 March 2023 will be able to make contributions whilst retaining any entitlement to protected Pension Commencement Lump Sums above £268,275.

The maximum Pension Commencement Lump Sum for those with Enhanced Protection with lump sum protection will be capped at the amount which could have been paid on 5 April 2023.

​From 6 April 2024

The Lifetime Allowance will be removed entirely.

Maximum Pension Commencement Lump Sum for those without protection will remain at £268,275 and be frozen thereafter.

Anyone who held protection before 15 March 2023 which gave them a protected right to a higher lump sum will retain that protection. For those with Enhanced or any of the Fixed Protections this will only apply provided they did not make any contributions between the date of protection and 5 April 2023.

The Details

​Annual Allowance

From 6 April 2023 the Annual Allowance (AA) will increase from £40,000 to £60,000. Carry forward will continue to work as previously. When calculating carry forward you should use the AA applicable in the tax year from which you are carrying forward.

For example, if no contributions had been made in the previous three tax years then contributions of up to £180,000 could be made in 2023/24. This would use £60,000 from the 2023/24 tax year and £40,000 from each of the three previous tax years when this was the applicable AA.

To qualify for carry forward the individual must have been a member of a pension scheme in the tax year from which they are carrying forward. It is also worth noting that personal contributions are limited to 100% of UK relevant earnings in the tax year the contribution is made.

​Money Purchase Annual Allowance

The Money Purchase Annual Allowance (MPAA) applies to anyone who has flexibly accessed their pension benefits. This includes anyone who has taken any income under Flexi-Access Drawdown or taken an Uncrystallised Funds Pension Lump Sum (UFPLS). Once benefits are accessed the standard AA no longer applies, and the lower MPAA applies instead. From 6 April 2023 the MPAA will return to its original level of £10,000. This higher level of MPAA also applies to those people who have triggered MPAA in previous tax years.

Once the MPAA has been triggered carry forward is no longer available – this is an allowance that has to be used each tax year or it is lost.

​Tapered Annual Allowance

The Tapered Annual Allowance (TAA) reduces the Annual Allowance available to those with high income. From 6 April 2023 where adjusted income is over £260,000 tapering may apply. Previously this started at £240,000. Adjusted income includes all income plus any employer pension contributions paid in the relevant period.

When the £260,000 limit is exceeded tapering will apply if threshold income is above £200,000. Threshold income includes all income but is reduced by personal contributions entitled to relief at source.

Where both limits are exceeded the AA is tapered by £1 for every £2 over the adjusted income limit.

The lowest allowance available in 2023/24 will be £10,000. This will apply to those with adjusted income of £360,000 or more as it is now tapering down from £60,000 instead of £40,000.

​Lifetime Allowance 2023/24

The Lifetime Allowance (LTA) will remain at £1,073,100 for the 2023/24 tax year. However, the Lifetime Allowance Charge (LTAC) that arises when the LTA is exceeded will be removed. Where the LTAC of 25% would previously have applied then this charge will no longer arise. For lump sum payments that would have been subject to the 55% charge, this charge will be removed and instead the excess lump sum will be subject to Income Tax on the recipient.

It is important to note that it is only the LTAC itself that is changing in 2023/24. Benefit crystallisation events will still take place, and pension scheme administrators are still required to report these events to HMRC as previously.

This means members will still need to provide information on any previous crystallisation events and details of any protections held. Providers will still issue benefit statements which state how much of the LTA has been used. The only difference is that the LTAC will not apply as previously.

​Lifetime Allowance 2024/25 Onwards

The Chancellor announced that from 6 April 2024 the LTA will be abolished completely and removed from legislation. This will happen in a future Finance Bill and is not part of Finance (No.2) Bill which came out on 23 March 2023. HMRC stated in its March Pension Schemes Newsletter that once the LTA is removed from pension tax legislation further information and guidance will be issued.

​Pension Commencement Lump Sum

In 2023/24 the maximum Pension Commencement Lump Sum (PCLS) will remain as 25% of the LTA – i.e. £268,275. From 2024/25 onwards when the LTA is removed the maximum amount of PCLS will be frozen at this level. However, see section below regarding those who hold protection.

We await confirmation of how UFPLS payments will be dealt with once the LTA is removed, but we would expect these to be restricted to prevent the tax-free element being higher than that available under PCLS.

​Protection

Since 2006, there have been a number of protections available that maintain a right to higher levels of tax free cash than the standard amount. These protections are to continue, subject to limits in some cases.

​Enhanced Protection

​Tax free cash could be registered for enhanced protection at the same time as applying for enhanced protection on total pension savings. To be eligible, TFC rights had to be more than £375,000 (25% of the original LTA) when simplification started in April 2006. This protection will be capped at the TFC value on 5 April 2023. New contributions can be made after 5 April 2023 without losing this protection, but they will not generate any new tax free cash entitlement.

​Fixed Protection

​Fixed protection was available at different levels in 2012, 2014 and 2016. Again the main condition was that no further contributions were paid after the date the relevant protection came into force. From 6 April 2023, fixed protection on the total value of pension savings will not be needed as there will be no LTA charge. But it will still be relevant in determining an individuals' rights to tax free cash. Provided protection was applied for before 15 March 2023 and the client holds a valid certificate, tax free cash protection of up to 25% of the fixed protection amount will not be lost, even if new savings are made from 6 April 2023.

​Primary protection and individual protection

​These rights are not specifically mentioned in the Finance Bill, so they should continue unchanged for the coming year. Protected tax free cash rights registered as part of primary protection should continue and under individual protection, tax free cash should remain at the lower of 25% of the amount crystallising and 25% of the individual's remaining protected LTA. Further contributions can always be made without invalidating these protections.

​Stand-alone lump sums

​The amount that can be paid under these provisions will be limited to the value as of 5 April 2023. The stand-alone rules allowed a person who had tax free cash rights at 5 April 2006 of 100% of the value of their occupational pension schemes for a particular employment to take all of those benefits as cash.

​Scheme-specific tax free lump sums

​There was no reference to this form of tax free cash protection in the Finance Bill, so the method of calculation will remain unchanged for the coming tax year.

​Payment of lump sums

​Certain lump sums that would have been subject to the 55% LTA charge will be taxed at the recipient's marginal rate. These include serious ill-health lump sums, LTA excess lump sums, defined benefits lump sum death benefits, and uncrystallised funds lump sum death benefits. These are generally tax free up to the LTA, and then 55% afterwards. In 2023/24, they'll still be tax free up to the individual's LTA and then taxed at the recipient's marginal rate afterwards.

What Happens Next?

The Finance Bill didn’t contain whole swathes of new pension legislation. That will follow in a future Finance Bill when the rules for 2024/25 onwards are laid out. So the vast majority of existing pension rules will stay the same and will continue to reference an LTA of £1,073,100.

When any benefits are crystallised during 2023/24, the process of testing against the LTA will continue as normal, but anything over the LTA won't incur the LTA tax charge (though see the section on certain types of lump sum benefit).

This also means that the calculation of the available tax free cash, for those without any lump sum protection, will also remain the same as this year - an individual will be able to get the lower of 25% of value of the benefits crystallising and 25% of their remaining LTA.

The Finance Bill will be debated in Parliament before becoming the Finance Act and receiving Royal Assent. The new legislation will not be fully enacted until well into the new tax year but will apply retrospectively from 6 April 2023.