Spring Budget 2023

0:05

Hello, my name is Clare Moffat, and I head up the intermediary development and technical team here at Royal London. Welcome to our first thoughts on the budget. And it was an exciting budget for the pension’s world. Now I'm delighted to be joined by three experts from the team. Craig Muir and Fiona Hanrahan will be looking at the changes in relation to pensions, together with Justin Corless, who'll be focusing on what this means from a public sector point of view. And I'm going to hand straight over to Justin.

0:33

Thanks, Clare.

0:35

Not going to discuss public sector immediately, but first we're going to have a look at the annual allowance. So Fiona, could you tell us a little bit about the annual allowance?

0:44

Thanks, Justin, and hi, everyone. So, in a DC scheme (defined contribution) or money purchase scheme, the annual allowance is the amount you can pay into your pension, or have paid in on your behalf, whether that's by a third party or an employer before a tax charge applies. In a DB or defined benefit scheme, the amount that gets tested against this allowance is the capitalized value of the increase in your benefits from one year to the next. So, the scheme will tell you that figure.

1:11

And for many years now, the annual allowance has been £40,000 and you've been allowed to use unused annual allowance for the previous three years prior to that, giving a theoretical maximum of £160,000 before that annual allowance tax charge would apply. Now, it's worth saying here that what I've just described here is the standard annual allowance which will apply to most individuals. Previously, or certainly up until now, those with high incomes above £240,000 could have their annual allowance cut to as low as £4,000, and those who have flexibly accessed their pensions will have a lower allowance of £4,000, and we'll cover that off shortly.

1:48

OK, that's great. Um, can you give us a bit of insight as to what happened in the Spring budget, 2023?

1:55

So, today, the standard annual allowance has been increased from £40,000 to £60,000.

2:00

And that's with effect from the sixth of April 2023, sixth of April this year. OK, and what's that going to mean for advisers?

2:09

Advisers will need to understand the impact that this will have and the potential for clients to now pay in more to their pensions, importantly without that tax charge applying. Fewer clients may need to make use of carry forward as, you know, the standard annual allowance is now higher and that, you know, the charge will apply from the sixth of April. Sorry, this change will apply from the sixth of April 2023. Carry forward will remain for those prior three years though at £40,000, then, that means when the increase takes place from April this year, someone in theory, then could have £180,000 total annual allowance instead of that £160,000.

2:48

OK, thanks, and what would you say that that means for clients?

2:53

Those paying in larger contributions and those using carry forward will be able to pay in more without that tax charge applying from April. And that could be particularly useful for clients who are paying in larger contributions in the run-up to retirement, especially business owners who might not have paid in much to their pensions in the past or those in public sector DB schemes who find their pension input amount is higher than that standard annual allowance.

3:16

So, it’s worth speaking to those clients, and a point to note, is that for individual contributions, remember, an increase in the annual allowance is really only relevant, if the client has the relevant earnings to support that contribution, in order to get tax relief on the contribution too. OK. That's great. Now, overall, who would you say that this is good news for?

3:36

It's good news, really, for anyone wanting to pay more into their pensions, as it's now possible to pay in, you know, 1.5 times more into their pension without a tax charge applying. So, good for those in DB schemes with high pension input amounts and those in the run-up to retirement, looking to maximize their pension funding.

3:53

So, this change combined with the lifetime allowance removal is obviously good news for pension savers OK. That's great, thanks.

4:02

Thanks, Justin. But now, I'm going to ask you about public sector. So, this change in the annual allowance does really have a significant impact on the public sector, doesn't it?

4:11

Oh, absolutely, yeah. The annual allowance increase to £60,000 is going to provide some relief to those impacted by pension tax charges with potential savings of £4,000, £8,000 or £9,000 in England, Wales, and Northern Ireland, depending on their tax band. It's slightly different in Scotland due to the different tax rates, but the savings will be broadly similar. However, the process for measuring pension input to defined benefit pension schemes is, including public sector schemes could see, some pension savers still inadvertently incur annual allowance tax charges. Now, unlike defined contribution schemes where the pension input is a fairly readily identifiable pound figure, as you mentioned before Fiona, defined benefit, pension input considers the difference in the capitalize benefits between the beginning and the end of the tax year.

5:05

Therefore, pay rises, promotions, additional pensionable work undertaken, and even the cessation of salary exchange agreements can all give rise to additional input, which won't always be apparent to scheme members until they’re advised of that tax charge. So, some of these aforementioned triggers impacts senior NHS clinicians. And that's a key group that the government is trying to, will either entice back to work or prevent leaving in the first place with these measures. And that's all to try and tackle record waiting lists in the NHS. So, the government is going to need to closely monitor the effectiveness of this increase to see that it does achieve their aim. Now, the increase as you say isn't retrospective so it won't immediately offer further annual allowance to carry forward to alleviate tax charges in the 22/23 tax year. However, the prospect of additional annual allowance in future years and the aggregation of accrual in different sections of the NHS pension scheme so that negative growth is no longer applied as a zero figure. OK, both of those things were in today's budget alongside, you know, the recent measures to align the CPI figure used to calculate the revaluations of benefits for inflation with the CPI figure used in the annual allowance calculation. Now, these things show genuine intent by the government to address the concerns of senior NHS staff.

6:31

Now, in recent years, advisers have often been tasked with calculating the likely pension input in the upcoming tax year for senior public servant’s, doctors, in particular, to determine whether an annual allowance tax charge is likely to apply and whether the member is best served staying in the scheme and paying that charge, or exiting the scheme to avoid the tax charge. Now, this increase in the annual allowance won't negate the need for that calculation, but it is likely to increase the frequency of staying in being the best option for members. Now this is important. As Scheme membership provides more than just pension accrual, it gives entitlement to short-term pensions. It alters almost always favourably the calculation a lump sum, death benefits. It improves ill health pension entitlement and the calculation of long term survivor pension benefits and all of these are extremely important if maybe sometimes overlooked, aspects of the decision to remain or leave. Now pensions are an important part of NHS remuneration package and in recent years they've often been cited as a disincentive to remain in employment. If we want a functioning NHS with reasonable waiting lists and people to have the confidence that they'll be able to see a medical professional when they need to, it's vital that the pension scheme and all its constituent parts encourage rather than discourage members to remain in or return to pensionable service.

7:56

That's really useful, thank you Justin. Now, moving on from the annual allowance, we're going to talk about the biggie, the lifetime allowance and I'm going to ask Craig, could you tell us a bit about the lifetime allowance please?

8:07

Certainly Fiona... and hello to everyone. Yeah, the lifetime allowance is the total amount of pension savings you can build up in a pension scheme before you or your beneficiaries face a lifetime allowance tax charge.

8:19

This tax is levied on the excess over the allowance and is charged at 55% if taken as a lump sum, or 25% if taken as income.

8:28

The lifetime allowance, it was introduced back in 2006. It started life at £1.5 million.

8:35

It got as high as one point eight million. Then gradually came down over the years to as low as one million pounds. So then, it had a few years of CPI increases to the level of one million, £72,100, and we were expecting those increases to continue until the budget of 2021 happened, and the then Chancellor Rishi Sunak announced it would remain at £1,017,100 for five years. So, that's up until 2026 or until legislative legislation changes.

9:06

Now, this freezing of the lifetime allowance meant many more people were caught by lifetime allowance tax charges, and for some, it was a disincentive to carry on working.

9:16

So, what's planned? So, what's happening now or what's changed?

9:20

So the government will remove the lifetime allowance charge from sixth of April 2023, before fully abolishing the lifetime allowance in a future finance bill.

9:30

At the same time, the maximum pension lump sum tax free cash for those without protections will be retained at its current level of £268,275 and will be frozen thereafter.

9:44

That's good news for clients then yeah?

9:47

Yeah, this increase to the lifetime allowance will restore much needed incentives for people to prioritize their pensions as they approach their later working years.

9:55

A lot has been said about increasing the lifetime allowance – it could be a way of solving the NHS pensions dilemma, you know the age 50 to 64 back to work, however, I won't say too much about this as our public sector specialist Justin Corless, will provide his views on this shortly.

10:10

But leaving the NHS aside for the moment, it is kind of difficult to say how these moves will get people back to work, especially once you've taken early retirement, you've worked out that, this is affordable lately that being able to put more in your patron would encourage you back In fact, it is possible that high earners who can maximize these allowance could end up leaving work sooner as a result of the higher limits as they'll be able to build up more, more quickly.

10:36

It's also possible that the changes could keep older workers who are still in relatively high, paid work, working for longer, so they can build up an even more decent target amount and have an even more comfortable retirement.

10:48

I’m sure the lifetime allowance changes will not only be welcomed by those approaching retirement, but also those who have already accessed their pension.

10:55

When a pension’s accessed, it was tested against the lifetime allowance at that point.

11:00

So, for example, if someone took benefits up to the limit £1,073,100 in 2022, then they would have used up 100% of the lifetime allowance. But the scrapping of the charge and ultimately, the removal of the lifetime allowance, will mean they can continue to fund for retirement, not be hit with a lifetime allowance charge, but they will not be able to receive any further tax free cash. Of course, unless a client has one of the protections, which allows them to receive a tax free lump sum greater than this, then this is no different to any other client.

11:33

But it's also going to help the beneficiaries of clients as well, won’t it?

11:35

Yes, you aren't exempt from the lifetime allowance on death, you know, if you die before age 75, and you haven't crystallized all your pension benefits, then the lifetime allowance charge applies to your beneficiaries as well.

11:49

Sometimes clients thought there wouldn’t have a lifetime allowance tax charge, but they die while working, and large death and service payments of, you know, for example, six or even eight times salary, would use up a lot of lifetime allowance. And that combined with their pension, could mean there was a lifetime allowance charge, but the budget has confirmed there’ll be a change in the taxation of the lifetime allowance excess lump sum, what are the serious ill health lump sum defined benefits, lump sum death benefit. And un crystallized funds, lump sum death benefit.

12:20

They’re currently subject of 55% tax, charge above the lifetime allowance to taxation at an individual's marginal rate.

12:28

Now, the real puzzler is, if there isn’t a lifetime allowance charge and ultimately a life tableaus limit, then, how can there be an excess over the lifetime allowance?

12:36

Does this mean the lifetime allowance limit will still apply in these instances? And the answer is, I don't know.

12:42

The detail of this will be contained within the finance bill though. OK, so, what do you think it means for advisers then?

12:52

For advisers, there's potential for your clients to save more into their pension, without breaching the lifetime allowance limit. For your clients, they can build up a larger pot which will mean more flexibility about how and when they access the benefits. And, of course, this is another major advice opportunity.

13:08

Also, revisit clients who've taken out protection in the past as they had restrictions of how much they could accrue.

13:14

And this has been removed so that they can start pension funding again, and note they'll still have the option to take tax free cash up to their protected limit, which will be higher than the new limit of £268,275.

13:27

Thanks for that, Craig. So, back to Justin, one of the reasons for this is in relation to doctors and dentists, can you tell us a bit more?

13:37

Yeah, today's effective removal of the lifetime allowance is, is likely to significantly ease public sector staffing challenge, that's been facing the government. While pension allowances can impact higher earners across the public sector, the issues have been particularly acute within the NHS where senior clinicians have been reportedly retiring early and or declining additional ships and responsibilities just to stave off its impunity perfects. Now, the removal of the lifetime allowance may prompt those people who were approaching the old lifetime allowance limit and considering remedial actions, such as leaving NHS employment, to reconsider. However, as Craig mentioned earlier, those who've previously taken their full PCLS of £268,275 or higher if they hold Lifetime Allowance Protections, won't be able to take further PCLS.

14:31

While, not ideal this, you know, as we say, is in line with the treatment of other pension members. Now, this increase should, really needs to be viewed in conjunction with imminent changes to allow NHS 1995 scheme members to take their 1995 scheme benefits and return to pensionable employment within the NHS, thus accruing further pension benefits prior to that proposed change, OK, which is due to take effect imminently. Once members of the 95 Scheme began taking their 95 scheme benefits, they couldn't build up further benefits in the 2015 scheme. And this proposed change incentivizes 95 scheme members, many of whom will be senior clinicians, just based on, you know, when you needed to, the age you need to be to be able to joined the 95 scheme to return to NHS employment now they can accrue further pension. And the removal of the lifetime allowance means that those benefits accrued, won't be lost to pension tax charges.

15:29

OK, now we're going to move on and talk about the money purchase annual allowance Clare.

15:34

Could you tell us about the money purchase annual allowance, please? Yes, so, the money purchase annual allowance is the amount that you can pay into a money purchase or DC scheme, without a tax charge applying after you've flexibly accessed your benefits. Now, this was introduced with pension flex stability. It began its life at £10,000, was then reduced to £4,000, and from sixth of April 2023, it will be back up at £10,000. Now, accessing your benefits flexibly, well that broadly is taking up one of those cash lump sums where you get that 25% tax at 0 and 75% taxed at your marginal rate. It comes together Or taking income from any drawdown, so that's even a pound of income, but only taking PCLS, just your 25% tax free Cash, and moving the rest into drawdown or buying an annuity with it. Or taking a small pot of under £10,000. Or continuing with benefits which have been accessed before pension flexibility in 2015, well they would not trigger the money purchase annual allowance. And also, if you’re a member of a DB scheme, then it wouldn’t trigger, you know, if you take your DB benefits DB benefits only, then that wouldn’t trigger the money purchase allowance either. And if someone is a member of a DB scheme that also has some, you know, DC funding, then they would have a maximum of £36,000 available for their DB scheme, but for defined contribution benefits they would have been restricted to that £4,000.

17:11

Thanks for that, Clare, and can you just remind us what happened in the budget for the money purchase annual allowance please? Yes, the chancellor when he stood up never spoke about this, but this was in the documentation, and it stated that the money purchase annual allowance will increase from £4,000 back up to £10,000 from the sixth of April 2023.

17:34

Yeah, it sounds like good news, so what does it mean for an advisors?

17:38

There'll be now clients who might want to pay more into their pension who could have been put off from doing this, and they might be willing to pay more now without having that tax charge applying. And so it's worth looking at any clients who have flexibly accessed their benefits and are still working. We've often come across clients who didn't take advice, and they took one of these cash lump sums out. And only later wanted to take some advice, hadn't really remembered, that they had triggered the money purchase annual allowance ... and didn't really realize that they couldn't perhaps contribute more to be limited.

18:09

So it's worth looking at those clients and also, do you have any clients who have retired, but then decided to come back to work, perhaps the cost of living is having a bit of an impact? So it just opens up an opportunity for more pensions saving after people have flexibly accessed benefits.

18:28

So what does it mean for clients then?

18:31

Yeah, I sort of briefly mentioned that those who have access their benefits flexibly.

18:35

So a false or taking income from drawdown and they would have been limited to pay £4,000 into their pension without having a tax charge. So so it's good news for those people because it just means that they can now pay contributions up to £10000 and and, you know, there will be people who access their benefits. Maybe during the Covid lockdown who are back working. They've been subject to the restricition. And so, again, good news for them, and particularly, and I mentioned already about people who might have retired, and now are back to work. So, you know, those put off by paying into a pension, or taking advantage of auto enrolment because of the money purchase annual allowance might now be keen to pay more into their pension, and, of course, take advantage of the benefits of tax relief and employer contributions.

19:23

So in summary, who is this good news for?

19:26

I think is good news for anyone who's accessed or benefits flexibly and they still want to pay more into their pension.

19:34

Justin, know, there might not be as much of a public sector angle, but can you give us a few words on this, please?

19:41

Yeah, absolutely.

19:43

Right, as Claire mentioned earlier, the money purchase annual allowance you know has minimal impact on defined benefit scheme members, I guess the clue’s in the name really, the money purchase annual allowance. I guess it will be good news for the small minority of public sector employees who have drawn income from any personal pension they have and still wish to contribute to it above £4,000 per annum.

20:07

To be fair in recent times, you know the concern for public sector employees who are likely to be affected by, you know, annual allowance issues is their input into the £40,000 annual allowance rather than concerns around defined contribution inputs. Perhaps now the annual allowance is £60,000, there may be more public sector members looking to make additional defined contributions. Contributions. And if they previously access their DC Pension Income in the way that Clare mentioned before, then the increase to £10,000 for the money purchase annual allowance will be welcomed. But, as you rightly say Craig, probably not as much of an impact there.

20:46

Yeah. Thanks for that.

20:49

Clare, there's also been a change in relation to childcare, now this might not seem like there's a pension angle to it, but there is, can you tell us more about that, please?

20:58

Yes. There was an announcement in the budget in relation to the extension of free childcare from children from the age of nine months. So basically, after maternity pay or paternity pay had run out, and then when they’re one and two, with equivalent funding in Scotland, Wales, and Northern Ireland. This of course is very welcome.

21:18

And it's going to help encourage caregivers who we know are primarily women back into the workplace. The Centre for Progressive Policy found that women provide twice as much unpaid childcare as men. And women are more likely to work part-time than men. This not only has an impact during their working lives, but ultimately contributes to a significant gender pension gap. Now, Royal London carried out some research last year and we had a report called Bridging the Gender Pension Gap. It highlighted that earnings are a key barrier to greater savings.

21:50

So when asked, what is preventing women from saving or saving more for retirement, 50% said that they don’t earn enough money compared with just 30% of men.

22:01

It also highlighted that men are much more likely to contribute more than the minimum required to their pension.

22:07

So, that's an important point, 48% of women aren't confident they're saving enough for retirement, compared to just 28% of men.

22:17

That’s brilliant Clare, so who is this good news for? Well, of course, it's good news for families in general.

22:23

Well, the introduction of auto enrolment 10 years ago helped more women than ever save into a pension. We do face this yawning gender pension gap though. So, stopping work or reducing hours for a few years, can have quite a significant impact in retirement. So, increasing the amount of childcare available will mean more women can go back to work. And this coupled with potential changes afoot to move the auto enrolment limit and mean women who work part-time can save into a pension as well, or save more into a pension. Women are concerned about their retirement, but no earnings or having lower earnings only helps to widen the gap. So, this is certainly going to be a benefit for families.

23:05

And so, what does this all mean for advisers then?

23:08

Well of course, most people won't take advice until they're nearer retirement. But this is going to increase the number of women, who have more of a pension at retirement.

23:18

So and you know, also for those advisers who sit in the workplace space, you know, employers might not be struggling to recruit as much, and because women might be able to go back and increase their working hours, So hopefully it means that people will have more in their pension funds and, and certainly that will help them deal with the cost of retiring.

23:42

I think that's all the main things covered.

23:44

So just a big thanks to Justin, Fiona and Craig. Thanks for your time listening today and I hope you found that a useful roundup, of course. As Craig mentioned, the detail is what's really important here. So, this is only our first thoughts on what happened from the documentation available, but there will be more detail in the weeks and months to come.

24:06

Thank you very much.