By Fiona Tait, Technical Director, Intelligent Pensions
Unsurprisingly this will not happen until 2024/5, leaving us with a bit of a hangover effect in 2023/4.
The good news
• There will be no LTA tax due on Benefit Crystallisation Events (BCEs) which take place after 6 April 2023.
• Individuals who have applied for and received Enhanced or Fixed Protection prior to 15 March 2023 will be able to make further pension contributions without attracting an LTA charge.
• Individuals who effectively lost some of their LTA as the result of a divorce will also be able to rebuild their funds.
• People in defined contribution plans will no longer be penalised for strong investment performance.
• And, of course, senior doctors and civil servants with large final salary entitlements will be able to work longer without being financially penalised for doing so.
The hangover
Although the LTA charge has been removed, or more accurately reduced to 0%, from April, the Allowance itself remains for another year. Therefore, any pension benefits which are defined in relation to it may still be restricted.
• Certain lump sums payments, including the Pension Commencement Lump Sum (PCLS), are only payable when the individual has available LTA. This condition is likely to remain in place for 2023/4.
• The result of this is that the maximum available PCLS is currently 25% of the LTA. The Treasury has confirmed that it intends to maintain this limit, not only in this year but going forwards. Even without the LTA, in the majority of cases the maximum PCLS available will be £268,275.
• Individuals with a protected right to higher PCLS will however keep this entitlement. This applies, in theory at least, even where contributions are made which would invalidate the protection under previous rules.
At the time of writing the draft legislation has not been made available, so it’s a case of ‘watch this space’.
More good news
Ostensibly with the same aim of benefiting senior doctors, the chancellor also announced changes to the Annual Allowance (AA):
• The AA will increase to £60,000 from 6 April 2023.
• The Money Purchase Annual Allowance (MPAA) will be restored to its previous level of £10,000.
• The AA taper still applies, however the Adjusted Income threshold will increase from £240,000 to £260,000 which will help, as will the fact that the maximum taper will still leave an AA of £10,000 instead of £4,000.
These changes take effect from the beginning of the 2023/4 tax year and are therefore cleaner than the LTA changes.
It should be noted however that the change applies to 2023/24 onwards. Tax relief on contributions made in previous years is still limited to the AA applicable in the year they were made, including any AA which is carried forward from previous years.
People who have already paid, or accrued, an AA or LTA tax charge may well feel aggrieved that these charges will still stand, however pension legislation is not retrospective, and these payments remain subject to the rules applicable at the time. At least the spreadsheets weren’t a waste of time.
The Labour view
Unfortunately for fans of simplification, no sooner had the Chancellor sat down than Rachel Reeves confirmed that a Labour government would reverse it, leaving planners in a bit of a quandary. Do we assume that it will be reversed in its entirety and all previous limits and protection will be restored, or is more likely that something of a similar nature will apply unaffected by the individual’s previous entitlements?
Sticking with the principle that pension legislation is not retrospective, it would seem unlikely that people taking action at a time that the LTA does not apply could be penalised for this later on. Depending on their views regarding the likelihood of a Labour government, some people may well feel that the time to withdraw, or at least crystallise, their benefits is within the next 2 years.
I wouldn’t be in a hurry to delete any of those spreadsheets just yet.
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