Spring Budget 2023: Govt to abolish LTA; AA and MPAA increased

Chancellor, Jeremy Hunt, has confirmed plans to abolish the lifetime allowance (LTA), whilst the annual allowance will be increased from £40,000 to £60,000 from April 2023.

As part of his Spring Budget, Hunt also announced plans to increase the money purchase annual allowance (MPAA) from £4,000 to £10,000, while the tapered annual allowance will also increase from £4,000 to £10,000 from 6 April 2023.

The adjusted income threshold for the tapered annual allowance will also be increased from £240,000 to £260,000 from 6 April 2023.

Under the changes, the LTA charge will be removed from April 2023 before the allowance is abolished entirely from April 2024, with this to be done via a future Finance Bill.

The reforms are designed to help ensure that high skilled individuals such as NHS clinicians are not disincentivised from remaining in the workforce, with Hunt suggesting that the changes will stop over 80 per cent of NHS doctors from receiving a tax charge.

He stated: "I have listened to the concerns of many senior NHS clinicians who say that unpredictable NHS charges are making them leave the NHS just when they are needed the most, and we will shortly publish a long-term workforce plan.

"But ahead of that, I don’t want any doctor to retire early because of the way pension taxation works.

"As chancellor, I have realised the issue goes wider than doctors, no one should be pushed out of the workforce for tax reasons. So today I will increase the pensions annual tax free allowance by 50 per cent from £40,000 to £60,000.

"Some have also asked me to increase the LTA from it’s one-million-pound limit, but I’ve decided not to do that, I will go one step further and I will abolish the LTA.

"It is a pension tax reform that will stop over 80 per cent of NHS doctors from receiving a tax charge, incentivise our most experienced and productive workers to stay in work for longer, and simplify our tax system, taking thousands of people out of the complexity."

In addition to this, the Budget papers revealed that, to help increase retention in the workforce of the public sector, open and closed public service pension schemes for a given workforce will be considered linked for the purposes of calculating annual allowance charges.

This aims to allow members to offset any negative real growth for annual allowance purposes in legacy public service pension schemes against the annual allowance, with concerns around the impact of negative growth previously raised in relation to the NHS pension scheme.

Industry experts previously speculated that the government was set to increase pension allowances as part of the Budget, arguing that these changes could be a “game-changer” for those savers who are currently limited when it comes to saving into a pension.

The LTA, which was initially £1.8m when it was introduced in 2006, recieved partiuclar focus ahead of the Budget, having been previously frozen at £1,073,100 until April 2026 as part of the Spring 2021 Budget.

The government had also faced growing pressure around the MPAA amid the cost-of-living challenges and rising inflation, as industry analysis revealed that in real terms, the allowance was worth £8,480 less than when it first came into force in 2015.

Recent pension withdrawal figures also sparked concern, with industry experts highlighting these statistics as further evidence that "squeezed savers are being forced to turn to their pension pots to make ends meet".

However, the government also confirmed that the maximum pension commencement lump sum for those without protections, the amount of tax-free cash that can be taken from a pension, will be retained at its current level of £268,275 and will be frozen thereafter.

Alongside the changes to pension allowances, Hunt announced plans to increase efforts around mid-life MOTs, confirming that the Department for Work and Pensions (DWP) will expand access to its in-person midlife MOT offer, providing financial planning and awareness sessions for 50+ Universal Credit claimants, aiming to reach up to 40,000 individuals a year.

“Planning for later life can be difficult, and some may leave the workforce early without a full understanding of their long-term financial resilience,” it stated.

“A midlife MOT is a review to help individuals take stock of their finances and wellbeing to prepare for a more secure retirement.”

This was alongside broader plans to encourage greater investment in UK growth, with specific plans to consult on requirements for Local Government Pension Schemes (LGPS) to consider investment opportunities in illiquid assets.

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