Pension market alert: UK announces changes to pensions lifetime allowance 

March 15, 2023

Several significant changes to the UK Pension Plan environment were announced by the UK Government in their annual Budget statement on 15 March 2023. These changes mainly impact higher earners and those with very long service. The key points are:

Lifetime Allowance charges will be abolished from the start of the new tax year (6 April 2023). Currently the value of pension entitlements in excess of this limit is subject to a significant tax charge. The Government had been under pressure to remove this limit, as it had been blamed for some higher paid National Health Service (NHS) employees retiring early. Many companies had also made special arrangements to offer alternative compensation instead of pension contributions for employees expected to be impacted by this limit, or the annual allowance (see below).

The annual allowance is the maximum contribution or increase in the value of accrued benefits that is permitted on a tax-free basis. This Annual Allowance will increase to £60,000 p.a., for members with “adjusted income” of up to £260,000, reducing to a minimum of £10,000 p.a. for members with adjusted income of £360,000 p.a. or more. (Adjusted earnings includes earnings, other taxable income, the value of additional pension accrual, and both employer and employee pension contributions). The Money Purchase Annual Allowance (which applies to individuals who have already started taking their Money Purchase benefits through “drawdown” or lump sum withdrawals) will increase from £4,000 p.a. to £10,000 p.a.

The maximum tax-free lump sum will be frozen at 25% of the current Lifetime Allowance (i.e. £268,275) with some limited exceptions. The Government’s intention is that this limit will no longer increase in future.

As part of the Long-term Investment For Technology and Science (LIFTS) initiative, the Government is looking to introduce new long-term investment vehicles.

The Government aims to provide more effective ways for Defined Contribution (DC) plan assets to be used to provide investment capital for the UK’s most innovative science and technology companies. A consultation on this initiative has now started with further detail promised in the Government’s Autumn Statement. In the meantime, the Government has also said that it will pursue an accelerated transfer of the £364bn Local Government Pension Scheme (LGPS) assets into assets that are “productive” for the UK economy.

This initiative is designed to counter the reducing proportion of UK pension plan assets invested in assets that drive growth. UK defined benefit pension plans have been driven by increasingly stringent funding regulations and mark-to-market accounting standards to reduce their exposure to equities from an average of around 70% of plan assets in the mid-1980s to only 19% in 2022, according to The Pension Protection Fund – The Purple Book 2022.

Companies and pension plan trustees will need to update their documentation and member communication to reflect these changes and will need to consider the impact on the ongoing GMP equalization projects underway. We can help you better understand the impact to your scheme and how to communicate with members.