United Kingdom: Relaxation of pension savings limits

Employer Action Code: Act

The U.K. government has announced significant increases to the Annual Allowance (AA) and the Money Purchase Annual Allowance (MPAA), and the abolition of the Lifetime Allowance (LTA). The measures are intended to reduce obstacles to continuing retirement provision for higher earners, and thus encourage those individuals who may have “maxed out” their tax-favored pension savings to continue working or to bring retirees back to the workplace.

Key details

• Effective from April 6, 2023, the standard AA for pension savings will increase from GBP 40,000 to GBP 60,000. The AA is the limit on an individual’s annual tax-favored pension savings in all private plans, including benefits accrued in defined benefit (DB) plans as well as contributions paid into defined contribution (DC) plans. Annual total pension savings in excess of the AA are taxable at the individual’s highest marginal tax rate. The AA is tapered down for the highest earners and will be reduced by 0.50 pence for each GBP 1 of taxable annual income between GBP 260,000 (currently GBP 240,000) and GBP 360,000 (currently GBP 312,000), and to GBP 10,000 (currently GBP 4,000) for individuals with annual income of at least GBP 360,000.
• The LTA will be abolished entirely from April 6, 2024 (many features of the tax regime are reliant on it, and creating a framework that operates without the concept of the LTA is a huge task), with the LTA charge being removed from April 6, 2023. The LTA applies to the accumulated value of an individual’s benefits in all private pension plans and is currently GBP 1,073,100. The value of a member’s accumulated pension is assessed against available LTA upon certain triggering events such as retirement and any excess is currently liable to an LTA charge — 55% (if taken as a lump sum; 25% if savings remain in the pension to deliver income). From April 6, 2023, there is no LTA charge: what was previously excess will instead be subject to marginal rate taxation when drawn.
• The maximum tax-free lump sum on retirement will continue to be determined as GBP 268,275 (25% of GBP 1,073,100) even when the LTA is removed. If members have a protected LTA (if they had savings above the LTA when it was reduced in 2012, 2014 and 2016, they can keep that higher LTA), their maximum lump sum is based on that protected amount. Currently, it is possible to lose a protected LTA, but from April 6, 2023, that will no longer be the case.  
• The MPAA was introduced when it became possible to access DC rights flexibly (broadly, allowing members to withdraw what they like, when they like) to mitigate the risk that individuals at or above the normal minimum pension age (currently age 55; age 57 in 2028) might access their DC savings and re-invest these into a pension and thus obtain further tax relief. Currently, members who have accessed their DC rights flexibly have an AA in relation to subsequent contributions to DC plans of GBP 4,000 per year. From April 6, 2023, this allowance will increase to GBP 10,000.

Employer implications

While abolition of the LTA appears to open the door to unlimited pension savings, the AA will restrict the extent to which pension savings can be made, and those most able to do so are likely to have their AA restricted by the “AA taper”. Plan sponsors who have embedded the LTA into the design of their pension plans, such as capping benefit accrual, may need to act ahead of the abolition of the LTA to ensure that the plan continues to operate as intended and that they do not see a large increase in liabilities through benefits becoming uncapped. Of the U.K. employers surveyed by WTW, 65% compensate senior executives if their benefits are restricted by the AA, usually via additional cash compensation. Some of those individuals may be able to return to registered pension provision.

Contacts

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Dave Roberts

Director

email Email phone +44 20 7170 2629

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David Robbins

Director, Retirement

email Email

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