Spring Budget 2023 | What does it mean for pension scheme trustees and employers?

The chancellor of the exchequer delivered his Spring Budget on 15 March 2023. For pensions, the key announcements were as follows.

Pensions tax allowances

To encourage workers over the age of 50 to extend their working lives, "help ensure that high skilled individuals such as NHS clinicians are not disincentivised from remaining in the workforce" and to simplify pensions tax, the government will legislate in the Spring Finance Bill 2023 to:

• remove the Lifetime Allowance charge for the tax year April 2023 to April 2024. A future Finance Bill will then abolish the Lifetime Allowance from April 2024;
• set and freeze the maximum Pension Commencement Lump Sum (that is, the tax free cash on retirement) for people who do not have any protections at the current maximum of £268,275;
• change the law so that, from April 2023, lump sums which are currently taxed at 55% on any amount taken above the Lifetime Allowance (Lifetime Allowance Excess Lump Sum, Serious Ill Health Lump Sum, Defined Benefits Lump Sum Death Benefit, and Uncrystallised Funds Lump Sum Death Benefit) are instead taxed at the individual’s marginal rate of income tax;
• from April 2023, increase the Annual Allowance from £40,000 to £60,000. (It will still be possible to carry forward unused Annual Allowances from the three previous tax years);
• from April 2023, increase the minimum Tapered Annual Allowance (TAA) from £4,000 to £10,000, and the adjusted income threshold for the TAA from £240,000 to £260,000; and
• from April 2023, increase the Money Purchase Annual Allowance from £4,000 to £10,000.

The government will also introduce secondary legislation to ensure that, from April 2023, "open and closed public service pension schemes for a given workforce will be considered linked for the purposes of calculating Annual Allowance charges, thus allowing members to offset any negative real growth for Annual Allowance purposes in legacy public service pension schemes against the Annual Allowance".

Long-term investment

There were a number of announcements directed at developing "the next generation of globally competitive companies that grow and list in the UK, and to bolster … retirement incomes" .

The government will "work closely with industry and regulators to bring forward an ambitious package of measures by the autumn"  to unlock "defined contribution (DC) pension fund investment into the UK’s innovative firms".

More immediately, the government:

• will spur "the creation of new vehicles for investment into science and tech companies, tailored to the needs of UK DC pension schemes, through a new Long-term Investment for Technology and Science (LIFTS) initiative". The government is inviting feedback on the design of the competition;
• will lead by example by "challenging the Local Government Pension Scheme in England and Wales to move further and faster on consolidating assets – a forthcoming consultation will propose LGPS funds transfer all listed assets into their pools by March 2025, and set direction for the future. This may include moving towards a smaller number of pools in excess of £50 billion to optimise benefits of scale. …The Government will also consult on requiring LGPS funds to consider investment opportunities in illiquid assets such as venture and growth capital, thereby seeking to unlock some of the £364 billion of LGPS assets into long-term productive assets".

Other changes

To support people with planning for later life, the government will expand "the midlife MOT Jobcentre Plus offer to reach more 50+ claimants through support sessions; improving the digital midlife MOT tool; and working with employers and pension providers to encourage signposting to the midlife MOT and related support". 

The government will also "legislate in a future Finance Bill to improve the administration of pension tax relief. This will enable the digitalisation of the current paper processes for Relief at Source, improving the experience for pension scheme administrators and reducing errors" … "Draft legislation will be published for consultation in summer 2023".

And the government will legislate "in Spring Finance Bill 2023 to address the pensions tax and corporation tax consequences of write-downs of liabilities of insurers in financial distress under the proposed new section 377A Financial Services and Markets Act 2000, and any subsequent court-ordered variation or termination of those write down-orders" (see policy paper).

Measures announced in July 2022

The Budget documents confirm that, in addition to the matters discussed above, the Spring Finance Bill 2023 will legislate for a number of measures announced on 20 July 2022:

• the making of "top-up payments, in respect of tax year 2024 to 2025 and onwards, to individuals with a total income below the Personal Allowance saving into a pension scheme using a net pay arrangement" in order to "better align outcomes with equivalent savers saving into pension schemes using Relief at Source" (see net pay arrangements policy paper).
• to clarify the tax treatment on transfers, periodic income and the valuation of dependant pension benefits during the wind-up of a Collective Money Purchase scheme (see policy paper).
• to amend tax legislation to support the expansion of the Dormant Assets Scheme (see policy paper).

Where can I find out more?

More information about these changes can be found in the overview of tax legislation and rates, pensions tax limits policy paper, and HMRC pension schemes newsletter 148.

The Finance (No.2) Bill, explanatory notes to the Bill (which include statements about the effect of the proposed amendments to the fixed and enhanced protection provisions), together with related Budget resolutions have also now been published.

Osborne Clarke comment

The changes to the Lifetime and Annual Allowance are welcome. They should make it easier for members to save and help to simplify some pension projects where fixed and enhanced protection have traditionally been a barrier or raised additional considerations.

For pension scheme trustees and employers, the changes raise a number of practical points and questions. Trustees and employers need to agree with their advisers what they can and will say to members, and what action (if any) they might like to take in relation to open cases. They need to consider how the changes affect any policies in place for higher earners/employees with long service periods and the rules of their pension scheme. They also need to be ready for questions from members.

Questions they might expect to see include:

• whether members who have already completed retirement forms to draw benefits this tax year, but have not actually received payment of any benefits yet, will be allowed to defer taking their benefits until after 6 April 2023 so as not to trigger a LTA tax charge (that is, has a "benefit crystallisation event" already taken place?);
• whether pensionable pay can be increased more significantly for active members of DB schemes in light of the increased annual allowance (particularly where pensionable pay is capped)?
• whether employees with lifetime allowance protections, who had previously not been able to be enrolled in the workplace pension scheme for risk of losing that protection, can now be enrolled into the scheme?

It is worth remembering that the current Finance Bill does not provide for abolition of the Lifetime Allowance. This is due to be included in a future – presumably the spring 2024 – Finance Bill.  In addition the Labour Party has said that it would reinstate the Lifetime Allowance if it is elected at the next general election so the budget may not be the last word on these issues.