Changes to Pension Planning Strategies following the recent Budget

Brian Radbone, Transact’s Technical Counsel discusses below. 

After many years of restrictions to both input into and benefits taken from pension schemes, the recent Budget included good news on both fronts. These changes will mean clients and advisers having to review, in a positive way, pension planning strategies.

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 advisers and their clients will be adopting new strategies as part of their pension planning. Labour’s announcement that they will introduce the LTA if they win the next election may mean that any strategy change should be actioned sooner rather than later.

Crystallise now to avoid any charge if the LTA is exceeded

Following the good news announcement about the LTA, Labour 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.

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 in the current tax year. 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, in most schemes, 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 FP2012 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 have been obtained). This will be particularly advantageous, along with the removal of the age 75 LTA tests, for those seeking to use their pension for inheritance tax (IHT) planning purposes.

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 during the summer. 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 and what reversal of the dismantling of the LTA will be introduced by Labour, should they win.

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