Changes to Workplace Pensions 2023

Senior Corporate IFA Consultant, Craig Pritchard Dip PFS, discusses some of the key updates and headlines to workplace pensions in Q2 2023.

There have been huge changes announced in the world of pensions this year already, including those of which came out of the surprising Spring Statement from Chancellor Jeremy Hunt. However, what do these changes really mean? The below summary of the key pension headlines of Q2 2023 explains more.

Previously set at £1,073,100, the Lifetime Allowance (LTA) will be abolished from 6th April 2024. This removes the maximum limit that can be accumulated in pensions before an LTA tax charge is incurred on the value of pension benefits exceeding the LTA.

Individuals with Lifetime Allowance protection who may have previously been exempt from Automatic Enrolment may now wish to reconsider joining their workplace pension scheme due to the ability to fund a minimum of £10,000 per annum.

Typically, the maximum permitted Tax-Free Cash Sum (TFCS) available from pensions is 25% of the policy value (older pensions may have higher entitlements).

Within the budget, it was announced the maximum tax-free cash sum permitted from pensions will be limited to a quarter of the previous LTA. This will result in a limit of £268,275 tax-free cash sum from all pensions an individual holds (excluding State Pension).

The Pension Annual Allowance (AA) is a limit on the amount an individual can pay into pensions (inclusive of employer/third party contributions) to receive tax relief in a tax-year. This has been set as 100% of an individual’s earnings to a maximum of £40,000.

Within the budget, the Chancellor announced the £40,000 per annum limit would be increased to £60,000 from 6th April 2023, therefore allowing mid-to-high earners to increase the funding of their pensions further if they wish.

The Tapered Annual Allowance (TAA) was introduced in 2016 and affects high earners. It initially impacted individuals with ‘adjusted income’ above £150,000, however this threshold was increased to £240,000 in 2020.

When an individual has ‘adjusted income’ above £240,000 per annum, the standard Annual Allowance of £40,000 is reduced on a tapered basis. The taper previously reduced the Annual Allowance by £1 for every £2 of income between £240,000 and £312,000, resulting in a minimum Tapered Annual Allowance of £4,000.

From April 2023, the new Annual Allowance will start at £60,000, and the taper will start at £260,000. The Tapered Annual Allowance will reduce to £10,000 for anyone with adjusted income of £360,000 or more.

Some employers limited employer pension contributions to £4,000 per annum and allowed any excess entitlement to be paid as additional salary to the affected individuals. Employers may wish to revisit this policy to allow higher levels of pension funding which may be more tax-efficient for the employee.

The Money Purchase Annual Allowance (MPAA) was introduced in 2015 to prevent pension freedoms being exploited through recycling. Employees aged 55+ who have accessed their pension but are still working (or returned to work after retiring) were potentially limited to contributing a maximum of £4,000 into a pension (inclusive of any employer contributions).

From April 2023, the MPAA will increase to £10,000 per annum, therefore allowing impacted individuals to pay more into their pension.

Employees who may have stopped funding their workplace pension or reduced their contributions due to the MPAA may now want to revisit their decision. As a result, employers may wish to communicate this change to any affected individuals or a wider communication to all employees over the age 55 for awareness.

The Government have given their backing to two significant changes to Automatic Enrolment (AE) following a Private Member’s Bill. Initially proposed in 2017, the changes will not be immediate but will give the Secretary of State the power to extend Automatic Enrolment with a timetable for implementation to be agreed.

The upcoming changes to Automatic Enrolment were announced as follows:

1. The minimum age to be enrolled is to be reduced from 22 to 18 years of age – which is a great way to encourage young workers to start saving for their retirement.
2. The Lower Earnings Limit applied to Qualifying Earnings will be removed, meaning the first pound of employee income is pensionable as opposed to starting at £6,240 per annum currently.

Following the 2017 review – which we have been discussing with our clients already in recent years – but there will be financial implications for employers and employees.

For schemes using Qualifying Earnings as the definition of pensionable pay, the removal of the Lower Earnings Limit will mean that the employer must fund an additional £187.20 per annum on the behalf of each employee within the workplace pension scheme. Employees will also see an increase as they will have to fund an additional £312 per annum before allowing for Income Tax Relief and possible National Insurance savings if salary exchange is used.

Although not confirmed at this stage, we would expect the removal of the Lower Earnings Limit to be phased in over time due to the additional financial cost for employers and employees during the cost-of-living crisis.

The government had previously published a review announcing their intention to increase the State Pension Age (SPA) from 67 to 68, from as early as 2037. In March 2023, they
announced this review will be placed on hold until after the next general election.

Currently the government plan to increase the SPA from 66 to age 67 in a phased introduction between 2026 and 2028. This will impact anyone born after April 1977.

The government are required, by law, to examine the impact of changes in life expectancy rates and National Insurance Contribution (NIC) payments on the state pension system every 6 years. We therefore anticipate further changes in the coming years.

If you have any questions regarding this update and require advice on your own pension planning needs, please do not hesitate to get in touch with one of our Independent Financial Advisers on 0117 450 1300.