Strategy Changes for Pension Planning Following the Budget

The Budget was dominated by the announcement that the Lifetime Allowance (LTA) is to be abolished from 6 April 2024 while the LTA charge will not apply to any excess arising on crystallisations occurring from 6 April 2023. This, together with other very welcome news, means that a number of scheme members will be adopting new strategies as part of their pension planning during the current tax year.

Crystallise now to avoid any charge if the LTA is exceeded

Following the good news announcement about the LTA, the Labour party very quickly stated that they will reintroduce the LTA should they win the next election. With this veiled threat hanging over those who will exceed their LTA it may be appropriate to fully crystallise benefits now. Whilst the PCLS will need to be taken, the remaining benefits can remain invested to be accessed as and when required. A reintroduction of the LTA by Labour is unlikely to retrospectively penalise those who have crystallised in excess of their LTA since 6 April 2023.

Taking PCLS where there are both defined benefit and money purchase schemes

Where someone has both defined benefit (DB) and personal pension benefits then the order of crystallisation may be important. For example, if the crystallisation of the DB scheme benefits occurs first and fully extinguishes the LTA then, when it comes to taking benefits from the personal pension, it will not be possible to take PCLS as there is no remaining LTA. The DB scheme can provide PCLS but this will reduce the annual pension payable. If the personal pension was crystallised first then the PCLS could be taken from this leaving the DB pension to provide the full pension without having to commute part of it to provide the PCLS whilst also no longer suffering any LTA charge on the excess amount crystallised.

Restarting pension input and maintaining protection where previously not allowed

It is now possible for those with enhanced protection and the various versions of fixed protection to recommence paying into their pensions without disallowing their protection. This means the higher PCLS entitlement will be maintained, so someone with  fixed protection of the 2012 LTA figure will still have a maximum PCLS entitlement of £450,000. Again, a reintroduction of the LTA by Labour may stop further input again, but it would be unlikely for there to be any retrospective disqualification of the protection for those who have restarted contributions.

Increasing contribution levels

The increase in the Annual Allowance to £60,000, the Money Purchase Annual Allowance to £10,000 and the limit at which tapering of the Annual Allowance begins to £260,000 will see increases in contributions as people make the most of the tax advantages offered by pensions including those freed from the input restrictions that did apply where enhanced and fixed protection had been obtained.

Taking death benefits

Although the LTA charge has been removed, there is still a tax charge applying to death benefit, serious ill-health and LTA excess lump sums which would previously have given rise to a 55% charge. The recipient of the payment will now instead be subject to tax on the excess amount at their marginal income tax rate. If the benefit is paid into a beneficiary pension rather than being paid as a lump sum then there will be no charge on any excess (previously 25%), and as there is no restriction on how much can be withdrawn, it would make sense for death benefits to always be paid to a beneficiary pension where offered by a scheme.

The legislative changes announced in the Budget are currently in draft form and will not be officially confirmed until Royal Assent is granted to the Finance Bill, probably sometime in July 2023. There are also likely to be further announcements issued as the LTA framework is dismantled and consideration given to how things are to operate in the ‘new world’ from 6 April 2024. And then there’s the prospect of an election…

1. Introduction
2. Transact Online (TOL) – Recent Enhancements
3. The Year of the Transfer
4. Consumer Duty & Cash Interest
5. How to Make Your Business as Fit as a Fiddle
6. Share Class Conversion
7. Transact- BlackRock MPS Update
8. Adviser Succession Planning
9. Strategy Changes for Pension Planning Following the Budget
10. Fund Changes
11. Interest on Cash Deposits
12. Transact Events 2023