Spring Budget 2023: Legal firms confident changes will simplify pension tax system

Legal firms have praised the changes made in the spring Budget, stating that they will likely result in a simplification of the pension tax system.

In yesterday’s (15 March) Budget, Chancellor, Jeremy Hunt, abolished the lifetime allowance (LTA), increased the annual allowance to £60,000, and increased both the money purchase annual allowance (MPAA) and the tapered annual allowance to £10,000.

Travers Smith pensions partner, Susie Daykin, noted that alongside raising the pension savings that people can build up without triggering the 55 per cent tax charge, abolishing the LTA will also make existing LTA tax protections, introduced as LTA thresholds fell, redundant.

“This will helpfully sweep away what is an extremely complex set of tax rules governing when such protections apply and can be lost,” she stated.

“As a result, both schemes and individuals will no longer need to worry about certain actions that were previously restricted because of the risk of impacting those protections.

“For example, schemes may have more flexibility in relation to equalising for GMP inequalities though the use of the conversion legislation."

The changes also make pension saving more attractive for high earners, noted Pinsent Masons pensions partner, Stephen Scholefield.

“Increasing the annual allowance to £60,000 and abolishing the lifetime allowance means that most people will no longer need to worry about the hideous complexity of the pensions tax rules,” he continued.

“It also removes an administrative headache for those who run pension schemes, which did little to aid the public’s understanding of pensions.”

Hogan Lovells counsel, Jill Clucas, described the abolition of the LTA as a “revolution in pension taxation".

“Without the LTA, individuals who have yet to draw their pension benefits may contribute to their pensions for as long as they wish, without fear of market rises (or government intervention) resulting in a LTA charge,” she added.

“This is a very welcome aspect of the Chancellor’s strategy to encourage longer working lives.”

Despite the positives, Sackers partner, Claire Carey, warned that the abolishing of the LTA would have knock-on consequences that will need to be worked through, and that the devil will lie in the detail of the legislation.

However, given the “relative frequency” with which the LTA has shifted previously and the complexity of the accompanying protection measures, its removal suggested “a significant step towards greater pensions tax simplicity”, she said.

While the changes are likely to simplify the system generally, Stowe Family Law partner, Matthew Taylor, warned that an unintended impact of the removal of the LTA may be to make high net worth pension negotiations in instances of divorce more complex.

He explained: “Whereas previously, pension sharing could be an attractive settlement route, as it could minimise or eliminate tax paid due to the LTA, that advantage no longer applies, which may lead to more arguments about whether pensions should be shared or not.”

Furthermore, pension consultancy firm Spence and Partners managing director, Alan Collins, noted that both tax-relievable pensions input and output need to be addressed.

“In particular, complex provisions such as MPAA are completely inconsistent with freedom and choice and changes in the way people will need to balance work and retirement in future as the 'cliff edge' is replaced by a 'multi-stage life',” she said.

“We therefore welcome the increase in the MPAA from £4,000 to £10,000."

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