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Speaker
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Transcript
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Helen Cracknell, Associate, Burges Salmon
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Hi everyone and welcome to the sixth and final episode of Season Three of the Burges Salmon Pensions Pod. My name is Helen Cracknell and I'm an Associate in Burges Salmon's pensions team.
In today's episode, we'll be discussing the pensions changes arising from the recent Spring Budget. I'm also joined today by regular host Chris Brown and Emily Fox, my current pensions Trainee. Hi both.
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Chris Brown, Director, Burges Salmon
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Hi Helen.
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Emily Fox, Trainee, Burges Salmon
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Hi Helen.
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Helen
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Our guest today is Catrin Young, our pensions team's Practice Development Lawyer. Catrin, welcome back to the podcast.
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Catrin Young, Practice Development Lawyer, Burges Salmon
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Thanks very much, thanks for having me.
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Chris
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So Catrin, the Chancellor of the Exchequer presented his Spring Budget 2023 to Parliament on the 15th of March and it was probably the biggest budget for pensions tax changes that we've had for years and we'll talk about what's in it but it was hotly trailed in the press especially over the weekend leading up to the 15th of March so I thought we could start by talking about what were we expecting before the budget.
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Catrin
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Yes, so I think the Daily Mail ended up with a scoop on this one, so it was all in the press the weekend before basically saying that the Chancellor was expected to increase the Annual Allowance and to increase the Lifetime Allowance from just over the £1,000,000 pounds that it's currently at. So there was sort of lots of of talk about that and in fact he'd already given some tips really because he'd stood up and delivered a big speech to Bloomberg on the 27th of January and basically said that you know he was trying to get people back into work and back to paying tax particularly highly paid professionals in the NHS and that they were looking at the conditions necessary to make work worthwhile and it's been a big issue in the NHS for a long time really with lots of senior doctors and consultants leaving because they they were experiencing issues with Lifetime Allowance and you know were just retiring so we knew quite a lot of what was coming and, in fact, I started writing our blog on it in the morning before the announcement came because I knew what was sort of being trailed. I watched the budget and then quickly hopped onto the laptop in the afternoon to finish off what the actual announcements were.
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Emily
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And of course, the most significant announcement was the abolition of the Lifetime Allowance as opposed to it's increase, what's the detail on that?
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Catrin
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Yes, so that was the bit that, well they obviously always like to to have a rabbit out of the hat when they're stood up delivering the the budget, so I think he said something like...
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Chris
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Yeah go on, we have probably got the same quote go on Catrin....
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Catrin
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Yeah, I think he said something like well you know I've been asked to increase the Lifetime Allowance but I'm going to go one step further and abolish it all together.
So basically what they've done immediately is from the 6th of April 2023 they've confirmed that no individual will incur a Lifetime Allowance charge however administrators are still going to have to operate Lifetime Allowance checks when paying benefits for example for assessing whether an individual has available Lifetime Allowance and issue benefit crystallisation event statements and then next year from 6th of April 2024 they're actually going to legislate to remove the Lifetime Allowance from legislation altogether and the reason I think they're delaying that is that there are references to the Lifetime Allowance in quite a lot of unexpected places throughout the dearth of pensions legislation so for example there is an exception in the automatic enrollment regulations that says that if employers have reasonable cause to believe that a member has protection from the Lifetime Allowance then they don't have to automatically enroll them into a qualifying pension scheme, instead it's a discretion as to whether to do that so you know they can't just...
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Chris
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Sorry I'm interrupting but I suppose now with the changes some members might opt in where they would have decided not to have done so before?
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Catrin
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Yeah absolutely, so we know some of the details come out since the budget last Thursday so on Friday we had HMRC publish Pension Schemes Newsletter 148 and there was sort of some residual questions about how it would work with protections etc. but the newsletter did say this point about the fact that you know nobody's going to be subject to a charge and anybody who currently has protection can now save into a pension scheme, can transfer to an alternative arrangement or can basically continue saving for their retirement without suffering that charge going forward so we have had some some clarification on those points since.
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Helen
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You mentioned the Lifetime Allowance protections, is it still worthwhile members having those?
We obviously advise a lot in our jobs about people who have protections and making sure that trustees check with their members whether they do have these but has that all fallen away or are there still some merit in the protections and some changes that will affect them?
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Catrin
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Yeah, that's an interesting one Helen because again that was something that didn't come clear until we had the newsletter last Friday but basically the position is at the moment that those with enhanced protection or fixed protection can lose that protection if they have further accrual or make impermissible transfers. As I said from the 6th of April that no longer applies so if you're doing any of those things after that date that's fine but the main advantage of retaining any existing protections is that you still get any higher rights you might have to a pension commencement lump sum. So one of the sort of stings in the tail of the increase or the removal I should say of the Lifetime Allowance is that the Chancellor did decide to freeze the current 25% tax-free cash at its current levels so at the moment and the current lifetime allowance is £1,073,100 so they have confirmed that the maximum pension commencement lump sum for those without protection will remain at 25% of that current lifetime allowance so £268,275.
That's interesting so for example if you are an individual with fixed protection 2012 so you have a protected lifetime allowance of £1,500,000 then you will still be able to retain that maximum lump sum of £375,000 so, yes, basically people in that position can get the best of both worlds at least for the time being.
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Chris
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I suppose the fact that the pension commencement lumps has effectively been capped means that that's opened the door now for future governments to maybe tinker with it and you know as we go through time I suppose the pool of people who might potentially be hit by that cap if it doesn't move is going to grow.
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Catrin
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Yeah I think that's a really interesting development Chris I mean it's the first time that any chancellor has really put their hands on the tax-free cash which is a huge benefit to everybody so now that we've got a figure that's going to be hardwired into legislation it does open the door to tinker with that figure going forward so yeah I think that that's going to be an interesting development.
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Helen
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And it hasn't received much press attention which is interesting as well.
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Catrin
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Yeah certainly initially I think that detail was was overlooked and much of the sort of press since has been more focused on the impact on death benefits but yeah I think that one is definitely quite a significant change and there were some hints in the press beforehand that you know one of the things they could look to do is to sort of reduce the amount of pension commencement lump sum that people could have so it certainly was something that was trailed but I don't think anybody really thought they would go there but there we are.
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Emily
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But haven't Labour already committed to reverse the abolition of the Lifetime Allowance if they win the next election?
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Catrin
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Yes I think they they came out very much the next day and said it's a change that benefits the richest in society and yeah if we win the next election we will reverse it which is interesting.
I mean if you look at the costings to the Budget this one is actually the one that costs the least out of all the other announcements that were made and because it doesn't affect the vast majority of people Labour are correct on that point but also because of course it was a Labour government that initially increased the lifetime allowance to the £1.8 million mark that it sat at before the Coalition reduced it back down again starting 2012. So you know the death bits I think might be an area which Labour may wish to look at again because the fact that the government have now confirmed that from the 6th of April nobody will be paying a Lifetime Allowance charge, what that means is that currently if you've got more than your Lifetime Allowance saved in a pension scheme and you turn 75 there is an imposed forced lifetime allowance charge on reaching 75 and you pay that tax.
Now that's not going to be the case so people might use it as a means of saving on inheritance tax because pension savings are not subject to inheritance tax so you get the tax relief on contributions going in, you're no longer paying a Lifetime Allowance charge and you can pass it on to your dependents when you die without paying any tax.
So whether they will look to do something around that or if they will look to reverse and reintroduce some sort of Lifetime Allowance again is the question and of course it makes it really difficult I think for people to plan and try and start to max their savings now not knowing if that's going to last beyond two years.
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Chris
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It makes you wonder if the answer to tax implications on pension savings because they're such, because they're around for the long term is just to take it out of party politics and are media economic drivers and that sort of thing and to have it governed by a cross-party group.
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Catrin
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Yeah I mean people need certainty.
If they don't want individuals falling back on the state in retirement then you know we need to be able to to know what the tax rules are not just now but into the future so it really shouldn't be a political hot potato but we all know that that's not been the case to date and I mean you know it is going to be interesting I think over the next couple of years to see whether this change is going to achieve the policy objective that the government is hoping it will so they've said obviously it's to encourage professional mid to high earners to stay and to return to work, pay more tax, grow the economy and the figures are really really scary actually so you know there's been a report from the Resolution Foundation back in February which shows that economic inactivity amongst all adults has risen by 830,000 since the start of the pandemic and 76% of those are amongst people age 50 plus and the amount of those people are disproportionately coming from high paying professional jobs so you know there is an issue that needs to be addressed and if it works and those people are coming back into the workforce and paying more tax because they're good earners and doing key jobs that we need to grow our economy then you know what will Labour do? Will they then want to try and put the brakes on again? So I think it's going to be interesting times. Sorry go on Helen.
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Helen
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Yeah I was gonna say I think it will be something that we just have to wait and see if it does achieve the policy objective but I certainly have people in my life who for example are retired GPs and I don't think once you've decided to retire and taken the time you will enter the workforce just because of this but I don't know it will be very different depending on different individual circumstances.
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Catrin
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Yeah I think you're right there, I mean I know both the Chancellor and Liam Fox who's the MP for North Somerset have said that they've spoken to people immediately after the budget in the NHS who've recently retired who have said they will go back but as you say there's quite a lot of of talk about well once you've made that decision and you've retired and you're on the golf course or you know going off traveling then are you really gonna go back to work so and also of course if you've already retired and you used all your lifetime allowance when you first access your benefits then you're stuck, you don't get any further lifetime allowance under the current tax regime so again unless the finance bill that's due tomorrow is going to do anything about that I'm not convinced it's going to help getting those who've made that decision back into work but where it might help I think is people who are coming up to retirement or are thinking of retiring in the next five to 10 years who might now decide to stay a bit longer, pay a bit more into their pensions, work a few more hours and you know try and boost things so they get a better income in retirement when they eventually do retire.
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Chris
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So, for recent retirees and those people not far behind them there's lots to think about. What about our employer clients and trustees of pension schemes, what should they be thinking about because of the changes and the removal of the Lifetime Allowance?
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Catrin
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Yeah so we've already got quite a few clients who have high earning members of staff who would have previously you know been subject to issues with the Lifetime Allowance and Annual Allowance and they've basically decided to opt out of any pension contributions, automatic enrollment and otherwise, and they've made individual deals with those employees to pay them what they would have had as pension contributions as cash or bonus.
So now that there is no lifetime restriction on pension savings then they might want to speak to those employees again and say right well do we want to unwind that agreement, do you now want the money into your pension, do you want to sacrifice salary and bonuses because of course then you don't pay employers Income Tax and National Insurance contributions on the pension payments going in so that's definitely one point for employers to start thinking about.
The other one is quite a lot of employers will have set up accepted life schemes for employees who face Lifetime Allowance issues so these are unregistered schemes that shelter lump sums on death and they've basically been sheltered outside of the the registered scheme tax regime so that they can provide those benefits and again if the policy remains permanent then those schemes may no longer be necessary in future and you can shelter them under your existing registered pension and life assurance arrangements.
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Chris
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They shouldn't fall away those arrangements, will they, so the question might be do employers who have them take steps to unwind them?
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Catrin
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Yeah so I mean they should still work you're absolutely right Chris quite a lot of them are written to automatically terminate on 10 years of commencement and that's to avoid other tax charges, periodic charges so maybe they can just be left to lapse at that point or you know or there should be provision in the rules to discontinue them earlier than that if employers want to so that's sort of on the employer side.
On the trustee side, a good news story we heard is as a result of all of is that any trustees who are currently going through GMP Equalisation and are looking to achieve that by way of conversion this might actually make things a bit easier because anything that helps with... Yeah absolutely so at the moment you know there was a concern that if you provide an uplift as part of a conversion exercise that might lead to some members with protections losing that protection, also another big issue has been the Deferred Member carve-out so that exempts certain increases to deferred pensions from an annual allowance test but only up to a point so that has meant that some trustees have decided not to convert Deferred Members until they actually, until retirement, so with the increase in annual allowance which was also announced making the Deferred Member carve-out less of an issue it might now be easier for some schemes to use GMP conversion for Deffereds as well so lots to think about but hopefully a good news story that one.
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Chris
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And just a very general point with all of this going on trustees might want to swot up to make sure that they can deal with if there are any queries from Members I suppose although I guess most queries will come from high earners who have protections.
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Catrin
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Yeah so they might... They're definitely... I think any high earner will probably want to go and see an IFA to assess what they want to do as a result of the the changes and I think the IFAs are already gearing up to ensure that they're set for the deluge of new work.
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Emily
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So we've spoken a bit about the lifetime allowance changes as the most significant announcement but what else is there in the budget?
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Catrin
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Yes so some of the other items which perhaps have had a bit less attention - one I've already mentioned. So the annual allowance which is the amount that individuals can pay in each tax year effectively into their pension arrangement, that's gone up from £40,000 to £60,000 and then some of the other types of annual allowances that we've got, so the money purchase allowance which applies if members have flexibly accessed their DC savings at age 55 or above that's gone up from £4,000 to £10,000 which again I think is long overdue.
Quite a lot of members during the pandemic would have partially retired but want to go back to work and do something but this is perhaps restricting them from making further pension savings so that's going to help them and the other one is the tapered annual allowance. So this is basically where at the moment your annual allowance of £40,000 reduces once you earn over £240,000 a year and you currently only get an annual allowance of £4,000 once you earn over £312,000 a year so those have been increased as well so basically now members can earn over £260,000 a year before they get a reduction in their normal annual allowance and you'll get an increased annual allowance of £10,000 pounds a year if you earn over £360,000 so that's better but again I think that's quite an interesting policy change because you might get people who are sort of close to earning £260,000 or just above who might decide to partially retire reducing their savings below £260,000 so that they can still continue to save £60,000 a year as opposed to less than that or whatever so yeah again that might not achieve the objective that the Chancellor is looking for of making sure those people stay in work and pay as much tax as possible in.
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Helen
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Catrin, there are a few other fringe announcements in the budget. I know today the government said that they were going to expand and improve their midlife MOT tool, could you tell our listeners a bit more about that and the other changes?
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Catrin
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Yes that's right Helen. So basically there's currently the midlife MOT which I don't think is very well known about and certainly hasn't been people making use of it. So it's currently available if you're in your 40s, 50s and 60s and you need a bit of guidance as to what your options are to ensure that you've got decent income in retirement so there's going to be greater investment in that to help individuals with planning so more advisors available and and promotion of that service.
Some of the other bits and pieces that were in there which we were expecting - so if you currently are a low earner and you make your pension contributions under a net pay arrangement so your total taxable income is less than your personal allowance of £12,571 then you're currently not getting the 20% tax relief on any pension contributions you make in because they're not automatically deducted by your pensions provider under a net pay arrangement so the government is basically saying that HMRC will now top up those payments so that's been headlined for a while and that's going to be legislated for and then as sort of tinkering to Collective DC schemes in wind-up, obviously we don't have many of those at the moment we've currently only got Royal Mail but there is a consultation on going to extend it to multi-employers, so there's a technical change to ensure that even where they're winding up they can continue to receive authorised pension payments and make transfers out etc. to other schemes and then in the public service scheme because they've obviously changed their pension arrangements back in 2012 and they they've had sort of legacy public sector schemes there's a technical change there as well to make sure that those two legacy schemes and their new one will be linked for the emphasis of calculating annual allowance charges. So, yeah, that's pretty much what was in there, but yeah pensions are definitely becoming far more newsworthy at the moment with this and the LDI crisis last Autumn we're hitting the Daily Mail so what more can you ask for.
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Chris
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By the time this Pod goes out, we usually record about a week before it's published, we'll have had the changes to the Finance Act you're saying Catrin, is that expected?
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Catrin
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Yes so Finance Bill 2023 is expected on the 23rd of March so hopefully that'll have some of the some more of the detail on some of these points so as and when we've digested it we'll be publishing a further briefing on that no doubt.
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Chris
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Super.
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Helen
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Perfect, thank you, thanks very much Catrin from coming on the podcast and imparting your wisdom on the budget on us and our listeners.
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Catrin
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No problem at all, thank you for having me.
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Helen
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Thank you for listening to the Burges Salmon Pensions Pod. That was our last episode of our Season Three but we're back again in the Autumn for Season Four.
If you'd like to know more about our pensions team and how our experts can work with you, you can contact myself or Chris or any of our team via our website. All of our existing episodes are available on Spotify, Apple or wherever you listen to your podcasts. Don't forget to subscribe and thanks for listening.
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