In the Budget 2023, Chancellor Jeremy Hunt implemented changes to the pension system in an effort to encourage older workers to remain employed rather than retire. However, the Labour Party argues that these new rules primarily benefit the wealthy and has pledged to reverse the policy.
One significant change is the removal of the cap on lifetime pension savings, known as the lifetime allowance (LTA). Previously set at £1.073 million across all pension accounts, the LTA was scheduled to remain in place until April 2026. Going forward, individuals exceeding this cap face a tax penalty of 65% on the amount saved above £1.073 million. Research indicates that only a small number of workers, around 1.4 million savers comprising just 4% of the workforce, are on track to breach the LTA. Initial speculation suggested that the LTA would be raised to £1.8 million; however, the Chancellor decided to abolish the LTA starting from April 2024, with the tax penalty being lifted from April 6.
The second change involves an increase in the annual allowance, which represents the limit on how much a retirement saver can contribute to their pension each year. Currently set at £40,000 per year, this allowance will rise to £60,000 starting from April. The Money Purchase Allowance, which determines the amount a saver can contribute once they have begun drawing from their pension fund, will also increase from £4,000 to £10,000 per year.
The government’s motivation for these changes lies in addressing concerns that savings limits and tax penalties are leading to early retirements or reduced working hours for senior doctors, resulting in a strain on the National Health Service (NHS) and longer waiting lists. Chancellor Hunt argues that scrapping the LTA will eliminate tax charges for 80% of NHS doctors and incentivize experienced workers to remain in their roles for longer. The Treasury estimates that the pension changes will lead to an annual cost of approximately £1 billion in lost tax revenue.
Over the years, successive Chancellors have made adjustments to the LTA, with the Labour Party initially introducing the limit in 2006 and the Conservative Party implementing the annual allowance in 2011.
These changes in pension regulations do not directly impact international Self-Invested Personal Pension plans (SIPPs) or Qualifying Recognised Overseas Pension Schemes (QROPS). However, they do affect the amount that can be transferred from a UK personal pension to a QROPS. Previously, the transfer amount was subject to the LTA, and any excess above the limit incurred a 65% tax. From April onwards, the LTA test will be abolished, allowing expats to transfer pension funds of any size to a QROPS. The annual allowance and money purchase allowance rules do not affect QROPS.
Public service pensions, civil service pensions, and State pensions adhere to the same LTA and annual allowance rules as private pensions. The State Pension operates differently, relying on the number of years of national insurance contributions (NICs) an individual has made. The current State Pension age is 66 years old but is set to increase to 67 by 2028 and 68 by 2046. While the Budget 2023 made no changes to State Pension rules, the payments will increase by 10.1% from April 6, 2023, due to inflation, with weekly rates reaching £203.85 for the full flat-rate state pension for those who reached state pension age after April 2016 and £156.20 for the full basic state pension for those who reached state pension age before April 2016. The maximum annual State Pension will be £10,600 from April.
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