The attraction of saving into a pension became a whole lot more in March 2023 when a number of pension allowances were boosted in the Spring Budget. The annual allowance, the money purchase annual allowance and the minimum tapered annual allowance were all increased. What’s more, the figure used for adjusted income calculations for those affected by tapering was increased from £240,000 to £260,000. Furthermore, the restrictions for those with Fixed or Enhanced Protection were removed, provided the protection was in place by 15 March 2023 – meaning that further contributions are now allowed.

However, I think the biggest game-changer of the lot was the removal of the lifetime allowance (LTA) tax charge last tax year and the replacement legislation that has come in for this tax year. By ‘game-changer’, I mean we need to completely rethink the way we approach pensions in terms of savings.

Which clients can benefit?

The most obvious beneficiaries from these changes are any clients looking to accelerate to retirement as they can now pay more into their pensions. The combination of increased allowances along with the increased taper thresholds, means that everyone now has a higher allowance than they did for the 2022/23 tax year – this amounts to between £6,000 and £30,000 of additional annual allowance.

Reasons to be cheerful

  • Annual allowance = £60,000
  • MPAA = £10,000
  • Tapered annual allowance minimum = £10,000
  • Adjusted income = £260,000
  • Fixed & Enhanced Protection contribution restrictions removed
  • Lifetime allowance charge removed
  • Lifetime allowance framework replaced

For instance, let’s look at a high earner – someone with adjusted income of £320,000. For the 2022/23 tax year, they were fully tapered meaning they had a tapered annual allowance of £4,000. The same client, with the same income this year, now has an annual allowance of £30,000. So, it’s certainly worth checking whether high-earning clients who previously stopped or lowered their pension contributions should start maximising their contributions again.

Business owners could also potentially benefit from the changes. The increase to corporation tax rates last year along with taxes on dividends means that the cost of withdrawing money from a business is high – for an additional-rate taxpayer, this could be in excess of 50%. So, is it salary versus dividends? Or should it be salary versus dividends versus pension contributions? I’d say it’s pension contributions, in terms of the client paying the lowest rate of tax.

Additionally, as mentioned earlier, Fixed or Enhanced Protection clients were previously unable to use their annual allowance without losing their protection. Provided this protection was in place by 15 March 2023, they have been able to make contributions from the 2023/24 tax year and utilise carry forward allowances. In some situations, these clients have gone from previously being unable to contribute anything to a position where they can contribute up to £200,000!

Finally, as I cover below, even those clients who exceeded the old lifetime allowance can potentially benefit.

Contributing where the LTA has been exceeded

It's fair to say, for all of the scenarios I’ve looked at above, one thing that may have stopped a client contributing was the lifetime allowance (LTA). However, the removal of the LTA and the replacement for this tax year means funding pension contributions above the allowances certainly makes sense. For Defined Benefit clients, the only thing that is now tested is the pension commencement lump sum (PCLS) payment. So, could these clients fund additional contributions to increase their PCLS entitlement and pension income provision? Even for those with Defined Contribution pensions, as I illustrate below, contributions over the old lifetime allowance now make sense.

DB clients 

Let’s start with a DB example where the client is age 50 and has no LTA protection. This is the classic Civil Service-type pension that has two arrangements. Scheme A pays benefits at 60, offers a scheme pension of £25,000 p.a. and a separate PCLS of £75,000. In Scheme B, there are accrued benefits of £25,000 p.a. and, while the client can take PCLS, the commutation would be 12:1 (so a £60,000 PCLS payment would reduce the scheme pension by £5,000 p.a.). For LTA purposes, the current prediction is £1,075,000 and so above the old limit.

Funding for additional benefits – DB clients

Client age 50 – no LTA protection

Projected benefits
Scheme A Scheme B
Pension benefits at 60 Pension benefits at 65
Scheme pension – £25,000 p.a. Scheme pension – £25,000 p.a.
PCLS (separate) – £75,000 PCLS – commutation 12:1
LTA = (£50,000 x 20) + £75,000 = £1,075,000

Considerations

  • Retiring at 60?
  • Additional PCLS to clear mortgage
  • Married
  • Has children aged 18 & 20
  • Will have an IHT problem
  • Pension benefits exceed old LTA?
  • Could/Should personal pension contributions be considered?

Let’s look at some of the considerations here:

  • If the client wants to retire at age 60, then that’s fine for Scheme A as the normal retirement age is 60. However, for Scheme B, the scheme retirement age is 65 which means if the client takes benefits there will be an actuarial reduction to their scheme pension.
  • What about if they require additional PCLS for clearing a mortgage or other debt, for example? They do have this option with Scheme B but it will be quite punitive in terms of the reduction to their scheme pension.
  • If the client is married, the good news is there is some succession planning in terms of the spouse’s benefits but there’s not really any succession planning opportunities for the children.
  • The client is likely to have an inheritance tax (IHT) problem.

The problem is, solving these issues with additional pension contributions was previously not practical because of the pension benefits exceeding the LTA. However, with the LTA tax charge no longer in place, could or should personal pension contributions now be considered? As I previously mentioned, under the new regime, the only amount tested against the allowances is the £75,000 PCLS payment and for this year the PCLS entitlement is £268,275. So, this client could accrue benefits and take a further £193,275 – they could make additional pension savings of £773,100 without incurring any tax charges while being able to access 25% tax free. So, I think it’s fair to say, pension contributions should definitely be considered for clients in this position, provided they have the annual allowances available.

DC clients 

So, what about DC clients where they are over the old lifetime allowance? Any additional contributions won’t provide any more PCLS payment but, in my view, that doesn’t mean they shouldn’t be considered. There would be an obvious benefit, for instance, if the client receives tax relief at one rate and then pays tax at a lower rate when the benefits are taken. However, even if they pay tax at the same rate, it’s still well worth considering making pension contributions. To illustrate this point, let’s compare paying money into an ISA against paying pension contributions for a client who is over the old LTA.

Pension contributions over LTA – DC Clients

Would your clients be interested in additional ISA allowance?

ISA contribution Pension contribution (HRT)
  • £6,000 contribution
  • Grows by 30%
  • Withdraws £7,800
  • £10,000 gross contribution
  • £6,000 effective net
  • Grows by 30%
  • Withdraws £13,000
  • Tax: £13,000 @ 40% = £5,200
  • Net proceeds = £7,800

Figures represent an employment scheme using net pay.

If they pay £6,000 into an ISA and it grows by 30%, they’ll have £7,800. Let’s look at the equivalent within a pension. If the client is a higher-rate tax payer, a £6,000 net contribution amounts to a £10,000 gross contribution after all tax relief has been reclaimed. If that amount grows by the same 30%, then the client will have £13,000 in their pension. If they withdraw the whole amount – and let’s assume there is no PCLS entitlement – they will pay 40% tax on the whole sum, which equates to £5,200. This still leaves the client with £7,800 – so, even where there is the same rate of tax, at worst, it’s the equivalent to the ISA but, dare I say it, the money is within a much more favourable IHT environment.

So, using a pension to save for retirement makes a great deal of sense for most clients, especially now everyone has a more generous annual allowance. And that includes clients who may have exceeded the old lifetime allowance.

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