Government Spring Budget 2023

Today's Budget announcement saw an abolishment of the Lifetime Allowance, an increase in the Annual Allowance, and upward adjustments to both the Money Purchase Annual Allowance and the Tapered Annual Allowance.

James Jones-Tinsley gives his analysis of what this means for pensions.

The abolition of the lifetime allowance from April 2024 is the opposite of a band-aid on a bullet wound; it is an operation on a graze. The rumours of an increase in the allowance raised questions around protections and people who had used their allowance already. The removal of the allowance altogether answers those questions, but raises many more.

The Chancellor must offer clarity, and quickly, on what happens to retirements currently being processed, and the impact assessment on retirement savings. Whether behaviours change and people get back to work will depend on if they think the change is here to stay, or whether future governments can reintroduce the allowance at a later date.

It is also unclear why the excess tax charge is being removed from April 2023 but the Lifetime Allowance won't be abolished until April 2024. If the abolition of the allowance requires primary legislation to pass, Labour may look to stonewall the Finance Bill as the abolition favours the wealthy. In that case, it may well become an unfulfilled promise in the next few months.

The changes to the lifetime allowance also mean that the maximum amount which can be taken as a pension commencement lump sum (PCLS) will be frozen at £268,275, which is 25% of the current standard lifetime allowance of £1,073,100. However, those with a protected right to a higher PCLS will continue to be able to access this right.

The Government will increase the Annual Allowance from £40,000 to £60,000 gross per tax year, with effect from 6 April 2023. From that date, the Money Purchase Annual Allowance (MPAA) will increase from £4,000 to £10,000, as will the minimum Tapered Annual Allowance. The adjusted income threshold for the Tapered Annual Allowance will also be increased from £240,000 to £260,000 from 6 April 2023.

The hike in allowances is good news, though it’s a shame the Chancellor didn’t mimic his drastic Lifetime Allowance solution and scrap the MPAA altogether. This would have helped more people than the Lifetime Allowance change will, and specifically those individuals who have semi-retired and who the Government would like to get back to work.