Before Jeremy Hunt stood up to deliver his first Budget this afternoon, we knew he was looking at ways to incentivise high paid professionals to remain in and even return to work. In a Kitchener-esque speech delivered to Bloomberg on 27 January 2023, he said “So to those who retired early after the pandemic or haven’t found the right role after furlough, I say: ‘Britain needs you’ and we will look at the conditions necessary to make work worth your while”.
The problem is a difficult one to solve and the numbers are concerning. As highlighted in this February 2023 briefing note from The Resolution Foundation, economic inactivity among all adults has risen by 830,000 since the start of the pandemic, with 76% of this rise being amongst people aged 50 and over. Furthermore, this cohort has disproportionately come from high-paying, professional jobs. In 2021, 35,000 more workers aged 50-70 from higher-paying professional and scientific roles flowed from employment to economic inactivity between the second and third quarter of the year compared to 2019.
However, will the carrots announced in today’s Budget be enough to entice this cohort back into work or will the change in Government policy only serve to antagonise them and those not far behind them, who will have planned their retirement based on a particular goal only to find that the playing field has now changed?
From 6 April 2023:
- The lifetime allowance charge will be removed, with legislation to be enacted to abolish the lifetime allowance entirely from April 2024. However, the maximum pension commencement lump sum for those without protections will remain at its current level of £268,275 (25% of the current lifetime allowance of £1,073,100) and will be frozen thereafter. This is an interesting development as it is the first time that a Chancellor has restricted a member’s right to 25% tax free cash. This potentially opens the door to tinkering by future Governments. Even if left alone, the freezing of that figure will mean that over time, a greater proportion of people will be able to access less than 25% tax free cash on retirement. The removal of the lifetime allowance charge also means that existing lifetime allowance protections may no longer be needed, save perhaps where members no longer wish to make further pension savings but want to retain a right to tax free cash of more than £268,275 under their existing protection. Members in that position with fixed protection will need to ensure they don’t inadvertently lose that protection by making further contributions into their pension.
- The annual allowance will increase from £40,000 to £60,000
- The money purchase annual allowance, which applies once members have flexibly accessed their DC savings, will increase from £4,000 to £10,000
- The tapered annual allowance is amended so that it will kick in once a member earns over £260,000 a year as opposed to £240,000 a year. Further detail is awaited as to whether tapering will apply on the same basis as at present – if it does, we would expect the taper to reduce a high-income individual's annual allowance by half of the amount by which their adjusted income exceeds £260,000, up to a maximum reduction of £50,000 (being the new £60,000 annual allowance and the increased minimum tapered annual allowance of £10,000). One potential unplanned consequence of the Government’s announcement is that high earners affected by the tapered annual allowance may choose to semi-retire earlier than previously expected so that they can reduce their salary below £260,000 and pay £60,000 a year into their pension now that they are no longer restricted by a lifetime allowance. This appears at odds with the Chancellor's objective of ensuring that this cohort remains in work, pays tax and helps grow the economy.
- Public service pension schemes for a given workforce will be considered linked for the purposes of calculating annual allowance charges, thereby allowing members to offset any negative real growth for annual allowance purposes in legacy public service pension schemes.
- The midlife MOT tool to support individuals with planning for later life will be expanded and improved.
The potentially disgruntled
Whilst many agree that these changes were long overdue, it does highlight the difficulty of successive Governments defining pensions tax policy by reference to existing national economic priorities when pensions, as we know, are long term vehicles intended to meet future individual economic priorities. Those who may feel aggrieved by today’s announcement and will no doubt be awaiting further detail include:
- Those who have already retired and who used all their standard lifetime allowance when they first accessed their benefits. This is because currently under s219 of the Finance Act 2004, if a member has had one or more benefit crystallisation event and the previously-used amount was equal to or greater than the amount of the individual's lifetime allowance at that time, no further lifetime allowance is available on subsequent benefit crystallisation events. It will be interesting to see if any changes on this will be forthcoming.
- Those approaching imminent retirement who have reduced or stopped their pension contributions in recent years due to concerns about exceeding the lifetime and/or annual allowance. Whilst individuals will continue to be able to carry forward unused annual allowances from the last three years, there is no ability to carry back the new higher annual allowance to previous tax years. Therefore, those due to retire shortly face having lower pensions savings than those looking to retire over the next decade or so, who now have the opportunity to boost their pensions savings at the time of their working life where they are financially best placed to do so.
- And it’s not just members who may feel aggrieved. Many employers of employees who previously faced lifetime and annual allowance issues agreed to provide such part of the employees’ remuneration package that would have been paid as pension contributions in another form, typically cash. Now that there is no lifetime restriction on pensions savings, they may wish they hadn’t paid additional tax and national insurance to the Treasury on those salary and bonus payments, as they will now surely face requests from higher earners to unwind that compensation agreement and/or sacrifice bonus payments and salary into their pension.
- Employers who have incurred additional costs setting up excepted group life schemes as a means of sheltering a lump sum payable on the death of a member affected by the lifetime allowance. These will no longer be needed although existing schemes should still work. Many trust deeds governing such schemes provide that they will terminate and be wound up within 10 years of commencement to avoid periodic charges applying. Employers may, therefore, wish to take advice as to whether such schemes should be left to lapse at that point or be discontinued now.
The main question is whether future Governments will choose to unwind today’s announcement in light of changing economic priorities and reintroduce a lifetime allowance or look to reduce the annual allowance once more. Regrettably, since Mystic Meg’s death last week, none of us have a crystal ball but what we can say with certainty is that pensions taxation policy is never constant.
Workers aged over 50 left the labour market in the greatest numbers during the COVID-19 pandemic. To encourage this group to extend their working lives, the government is increasing tax relief on pensions. The Lifetime Allowance charge will be removed from April 2023 before the Allowance is abolished entirely from April 2024, and the Annual Allowance will be raised to £60,000. These reforms will help ensure that high skilled individuals such as NHS clinicians are not disincentivised from remaining in the workforce