In his 2023 Spring Budget, Chancellor Jeremy Hunt announced the first in a series of key pension changes from 6 April 2023. This included the removal of lifetime allowance (LTA) charges, an increase in the annual, tapered and money purchase annual allowances and a boost to the level of ‘adjusted income’ applying before the taper kicks in. A future Finance Bill will legislate to remove the concept of LTA completely from pensions legislation from 6 April 2024 – no mean feat given its prevalence in primary legislation, regulations and HMRC guidance. Combined with earlier Budgetary announcements – in particular the frozen income tax thresholds applying until April 2028 – it’s clear the use of pension contributions for tax planning purposes, already central to most advice recommendations, will become even more attractive over the next few years.
The opportunity at hand
It has long been accepted that, for almost all clients, the use of pension contributions for tax planning purposes makes good sense. A contribution made personally to a registered pension scheme reduces a client’s ‘adjusted net income’ – broadly their total taxable income before any personal allowances less certain deductions. This in turn lowers the amount of income tax they pay, protects certain benefits and allowances and boosts the level of their pension savings.
A new tax planning opportunity has now become available from 6 April 2023 for clients who have previously registered with HMRC for certain types of LTA protection, namely enhanced and fixed protections. These customers have for many years been restricted on making further pension provision. Many will have looked to other forms of investment to meet their objectives and savings needs, but now have an opportunity to review their circumstances and possibly restart their pension contributions. It’s likely that those affected will require specialist guidance and reassurance that restarting contributions won’t impact on their LTA protections or existing entitlements to pension commencement lump sums (PCLS).
Clients with enhanced protection
Registering for enhanced protection was generally only possible until 5 April 2009. It offered full protection from any future LTA charge regardless of the growth in value of benefits when eventually taken.
In return, no further ‘relevant benefit accrual’ was permitted on or after 6 April 2006. Broadly, for defined contribution (DC) schemes, this meant that no further contributions could be made. And in defined benefit (DB) schemes, any increase in benefits had to be within a certain limit and tested at the point benefits were taken, otherwise protection was lost. In addition, it was generally only possible to create new arrangements under a registered pension scheme for the purposes of receiving a ‘permitted transfer’.
Since 6 April 2023, those who held a valid enhanced protection certificate before 15 March 2023 can restart contributions, set up new arrangements and transfer between schemes without affecting their existing protection. It also won’t reduce their existing entitlements to PCLS, even if above the ‘upper monetary cap’ (i.e., £268,275) announced in the Spring Budget.
The PCLS position for those with enhanced protection differs between those who had PCLS entitlements on 5 April 2006 of £375,000 or more, and those with lower entitlements.
If PCLS on 5 April 2006 was more than £375,000
The PCLS value also had to be registered with HMRC. The enhanced protection certificate issued then expressed this entitlement as a percentage of the remaining uncrystallised funds available at each future benefit crystallisation event (BCE). The Spring Budget announced a change to these provisions from 6 April 2023 which means the stated percentage will in future be limited to the value of benefits held on 5 April 2023 (rather than as at the BCE date). It will be important to gather evidence of the value of uncrystallised funds held on 5 April 2023, which may prove tricky if scheme investments are illiquid and require specialist valuation (for example, commercial property).
Example:
- John had a £2 million fund on 5 April 2006 and a PCLS entitlement of £400,000. His enhanced protection certificate from HMRC shows he’s entitled to 20% of his uncrystallised funds as PCLS.
- If the value of his uncrystallised benefits on 5 April 2023 was £4 million, then this effectively sets a cap on his PCLS entitlement of £800,000.
- If his funds grow to £5 million due to investment growth and new contributions and he decides to take benefits in full, his maximum PCLS would remain at £800,000 (20% of the value on 5 April 2023).
At the time of writing previous crystallisations aren’t included in the maximum PCLS calculations for these clients which would leave open a loophole for those affected to take benefits in stages to access a higher amount of PCLS than the new provisions intend. We expect this will be addressed in the finalised legislation.
If PCLS on 5 April 2006 was £375,000 or less
Then no registration of PCLS with HMRC was required when the application for enhanced protection was made. No change was made to the provisions applying in the Spring Budget.
PCLS for this group of individuals will continue to be limited to the lesser of 25% of:
- the funds being crystallised
- the available LTA set at its previous £1.5 million level
Clients with fixed protection 2012
Registering for fixed protection 2012 was generally only possible until 5 April 2012 and offered those applying a higher LTA of £1.8 million.
In return, no further benefit accrual was permitted on or after 6 April 2012, slightly different to the provisions applying for enhanced protection. Broadly, no contributions could be made to a DC scheme on or after 6 April 2012 and any increase in benefits in a DB scheme had to be within a certain limit but here this was measured on an ongoing basis rather than when benefits were taken. In addition, again it was generally only possible to create new arrangements under a registered pension scheme for the purposes of receiving a permitted transfer.
From 6 April 2023 these clients also have freedom to restart contributions, set up new arrangements and transfer between schemes without losing fixed protection status or affecting their PCLS entitlements.
PCLS for this group of individuals will continue to be limited to the lesser of 25% of:
- the funds being crystallised
- the available LTA set at its previous £1.8 million level
Clients with fixed protection 2014
Registering for fixed protection 2014 was generally only possible until 5 April 2014 and offered those applying a higher LTA of £1.5 million.
In return, the same provisions on benefit accrual and permitted transfers as for fixed protection 2012 also applied, but effective from 6 April 2014. From 6 April 2023 these clients also have freedom to restart contributions, set up new arrangements and transfer between schemes without losing fixed protection status or affecting their PCLS entitlements.
PCLS for this group of individuals will continue to be limited to the lesser of 25% of
- the funds being crystallised
- the available LTA set at its previous £1.5 million level
Clients with fixed protection 2016 who registered prior to 15 March 2023
Registering for fixed protection 2016 is still possible, provided the client is eligible, and offers a higher LTA of £1.25 million.
In return, the same provisions on benefit accrual and permitted transfers for previous fixed protections also applied, but effective from 6 April 2016. From 6 April 2023 clients who had registered for fixed protection 2016 before 15 March 2023 also have freedom to restart contributions, set up new arrangements and transfer between schemes without losing fixed protection status or affecting their PCLS entitlements.
PCLS for this group of individuals will continue to be limited to the lesser of 25% of
- the funds being crystallised
- the available LTA set at its previous level £1.25 million
Clients with fixed protection 2016 who registered on or after 15 March 2023 and any successful late applications for enhanced protection.
Those who register for protection on or after 15 March 2023 are subject to different conditions from those who had already registered.
A successful registration for fixed protection 2016 on or after this date offers a higher LTA of £1.25 million and the prospect of PCLS based on the lesser of 25% of:
- the funds being crystallised
- the available LTA set at its previous £1.25 million level
However, for any registrations for fixed protection 2016 (or any late applications for enhanced protection accepted by HMRC) on or after 15 March 2023 the previous provisions on further benefit accrual and permitted transfers continue to apply. Any contributions paid to a DC scheme from 6 April 2023 for these clients, for example, would cause the protection to be lost and PCLS would then be based on the LTA of £1.0731 million.
Clients with primary protection and individual protections 2014 and 2016
With primary and individual protections 2014 and 2016, there was no previous requirement for contributions or benefit accrual to cease. Although, many clients who registered for these forms of protections did also cease contributions, fearing further provision may simply increase the chances of paying an LTA charge in future.
The removal of LTA charges from 6 April 2023 may mean clients who have previously applied for one of these other forms of LTA protection may also benefit from making further pension provision and will require specialist guidance.
Funding opportunities for your clients
All affected clients have an opportunity to take advantage of the increased pension contribution allowances applying from 6 April 2023. These are:
- The annual allowance increase from £40,000 to £60,000,
- The money purchase annual allowance increase from £4,000 to £10,000
- The minimum tapered annual allowance increase from £4,000 to £10,000
The carry forward provisions allow clients to contribute more than the annual allowance in a tax year without incurring a tax charge. This will be particularly relevant to clients who previously registered for enhanced or fixed protection. They’ll have been members of a registered pension scheme in each of the three tax years, and no contributions will have been paid due to the restrictions in place before 6 April 2023. Prospectively this may allow as much as £180,000 to be paid by way of new pension contributions – £60,000 for the current tax year and £120,000 unused from the last three years.
High-earning clients who are affected by the taper will need your help to gather all the information necessary to calculate the maximum contribution possible in the current tax year together with any unused allowances from the previous three years. The increase in ‘adjusted income’ to £260,000 from 6 April 2023 will mean all clients affected by the taper will be able to pay more than previously possible and some may now be able to avoid the taper completely.
It should be remembered that the tax relief provisions work independently. Tax relief on any pension contributions paid personally are only tax relievable up to 100% of the client’s relevant UK earnings in the current tax year, even where carry forward is being used. The position is different for employer contributions where there’s no such link to earnings on the amount that an employer can pay. The wholly and exclusively provisions will determine if the employer is able to treat its contribution as an allowable deduction from profits for the purposes of corporation tax relief.
Don’t forget those without protection
In this article I’ve focused on clients who had applied for enhanced and fixed protections and were previously restricted from making further pension provision. However, there are many more clients who will also be interested in restarting or increasing their contribution following the LTA changes. For example, clients who had previously exhausted their LTA – particularly current higher and additional rate taxpayers who are likely to be paying a lower rate of income tax when benefits are taken.
Clients who previously opted out of their employer’s workplace pension schemes due to their LTA protection could also stand to benefit. Plus, others who opted out or opted down for a lower contribution who may have been concerned about breaching the LTA in future.
Make the most of the Spring Budget changes
The Spring Budget has given you a fantastic opportunity to review your clients’ circumstances from a pension tax planning perspective, with increased contribution allowances across the board and new freedom from restrictions for clients previously closed off to further pension provision, now able to reengage and recommence contributions. With your support, guidance and reassurance all affected clients can maximise the tax advantages available to them and achieve the best possible outcomes.
This information is based on our understanding of current taxation law and HMRC practice, which may change. The value of any tax relief will depend on individual circumstances.