Tax relief that lasts a lifetime

The March 2023 Budget introduced significant changes to tax relief. Maggie Williams explores the long-term impact

Whenever the Budget approaches, the money pages of daily newspapers and front pages of pensions trade magazines traditionally fill up with speculation about changes to pension tax relief.

In the past, that speculation has generally come to nothing – but April 2023 was different. Chancellor Jeremy Hunt announced changes to the annual, lifetime and money purchase annual allowances, affecting how much savers can put into their pensions, and their options once they have started to take money out. But how much difference will the changes make to the majority of pension savers over time?

WHAT’S CHANGED?

The key changes are:

• Lifetime allowance (LTA) abolished from April 2024, but there will be no lifetime allowance charge for the tax year 2023-2024

• Annual allowance (AA) increased from £40,000pa to £60,000pa

• Money purchase annual allowance increased from £4,000 to £10,000

• 25% tax-free cash frozen at a maximum of £268,275

• Tapered annual allowance trigger increased from £240,000 to £260,000.

The PLSA’s Director of Policy and Advocacy, Nigel Peaple says that the changes are good news. “The pensions tax relief system provides crucial support for people by boosting their savings over the long term. The PLSA has long argued that tax relief is needed to encourage behaviours which help more people achieve an adequate income in retirement.”

Over the long term, Peaple believes that these changes will help to keep employees in the workforce for longer, by giving them extra incentive to save into their pension. “Increasing the LTA, AA and MPAA will encourage older, often highly skilled or experienced workers, to stay in the workforce and provide more flexibility for retirees to re-enter the world of work.”

He adds that it will also enable members to think more widely about pension savings. “These changes will also allow additional scope for savers to contribute lump sums, perhaps from an inheritance or a redundancy payment, into their pension to meet any shortfalls before they retire.”

WILL THE CHANGES HELP LOWER EARNERS?

While more generous tax relief will be music to the ears of high earners and the businesses who desperately need to retain their skills and experience, how much impact will this have on low and middle earners?

Ian Colvin, Head of LGPS benefit consulting at Hymans Robertson says that changes to the LTA and AA will be important for some LGPS members. “Although the LTA only affects a small number of LGPS members, the nature of the scheme means that senior officers with long service have very little flexibility to amend their pension savings to stay within the limits.”

However, Phil Brown, director of policy for People’s Partnership, says that the changes will have little impact for most people. “The announcements will do nothing to solve the problem of undersaving in the UK. These changes won’t impact the vast majority of savers and means very little to the millions of people who save through automatic enrolment.”

The proposed changes put forward in Jonathan Gullis MP’s Private Members Bill to extend the scope of auto-enrolment will be more significant for people on lower and average earnings, agrees Peaple. “We believe the Government should go further still by gradually increasing pension contributions in the late 2020s and early 2030s so that they rise from 8% to 12%, with a larger share of the increases falling on employers.”

Peaple adds that low earners in particular will also be more affected by changes to the State Pension Age than by rethinking tax relief. “Many people, especially those on lower earnings, rely heavily on the State Pension for their retirement income. Increases in the State Pension Age fall disproportionately on people on lower incomes who generally have poorer longevity, so it is positive that the Government did not decide to bring forward the date at which the State Pension Age would rise to 68.”

Abolishing the LTA and extending the AA removes a crucial barrier to longer-term pension savings for higher and some middle-income earners. And, increasing the MPAA will encourage people already accessing their pensions to continue to save. But this is only part of the story. To help everyone save for an adequate pension requires wider reform and joined-up thinking across all aspects of retirement savings.