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Budget increases pension saving capacity to facilitate return to work

Budget increases pension saving capacity to facilitate return to work

15 Mar 2023

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What you need to know

  • As was widely anticipated, the Chancellor has announced increases to the amount of tax-efficient pension savings that can be made each year, whilst also removing the lifetime pensions saving allowance.
  • These changes were expected as part of the Government’s strategy to remove barriers to those over 50 entering or returning to the workforce. It also delivers on the Government’s aim to mitigate the so-called NHS ‘tax trap’.
  • The increases to allowances are significant. The base Annual Allowance is increasing to £60,000, the Money Purchase Annual Allowance (for those who have already accessed pension saving) is increased to £10,000.
  • The impact of the tapering of the Annual Allowance is also being reduced and will now apply to members with income of more than £260,000, compared to £240,000 currently. The minimum Annual Allowance for the highest earners increases from £4,000 a year, to £10,000.
  • While the LTA is being abolished, the maximum Pension Commencement Lump Sum is being frozen at £268,275.
  • For members of open and closed public sector schemes, these will now be linked for the purposes of the Annual Allowance.
  • The announced changes apply to all pension savings, and will apply from the 2023/24 tax year.

Actions you can take

  • Understand the changes to taxation of pension benefits to prevent having to rework plans and retirement figures for members approaching retirement.
  • Consider whether the scheme needs to adjust their benefit design in light of the tax changes.
  • Consider member education so members are made aware of their tax-free allowances to encourage greater retirement savings (and also capture people that may still be negatively impacted by the tax thresholds).
  • Look at life assurance arrangements to ensure these are being provided in the most efficient way.

The major changes in the Spring Budget 2023


Impact of change

Lifetime Allowance

Currently £1.073m for most members, now being abolished

Standard Annual Allowance

Increasing from £40,000 to £60,000 a year

Tapered Annual Allowance

Increasing from £4,000 to £10,000 a year

Income threshold for tapering

Increasing from £240,000 to £260,000

Money Purchase Annual Allowance

Increasing from £4,000 to £10,000 a year

Tax free cash at retirement

For members without Lifetime Allowance protection, this is being limited at the current maximum amount of £268,275 (and will be frozen thereafter)


The finer detail: Actions to consider following the 2023 Spring Budget


In the past, some members have opted out of their pension arrangement due to tax charges significantly eroding the value of the money going into their pot. In lieu of their contributions, the employer typically provides a compensatory salary supplement.

These members may now wish to consider opting back into the pension arrangements to make use of the higher allowances.

Member communications

These will need revisiting in light of the pension changes.

For example, retirement quotes will no longer need to cover the Lifetime Allowance but will need to mention the cap to the Pension Commencement Lump Sum.

Scheme Design

Some schemes chose to introduce categories that limited a member’s pensions savings to the £40,000 Annual Allowance (including a £4,000 limit for members most impacted by the tapered Annual Allowance).

These schemes will want to revisit these arrangements.

Member education

The pension changes in the budget were largely aimed at higher earners, with no amendment to the minimum contributions that must be paid to the scheme by the wider membership.

Employers and trustees may wish to ensure members are made aware of the limits on pensions savings so they are making the most of their tax-free allowances (whilst also identifying members that could potentially be impacted by unexpected tax charges).

Life Assurance

The decision to abolish the Lifetime Allowance positively impacts on group life assurance schemes.

Lump sum death benefits, when combined with the value of any registered pensions can normally be paid tax free, but only up to the Lifetime Allowance, so removal of this restriction will be very welcome for trustees, employers, and employees alike.

Whilst the Lifetime Allowance is being abolished for the tax years 2024/25 onwards, our understanding is that for the tax year 2023/2024, where benefits could have been subject to a tax charge of 55%, this would be at the member’s marginal rate.

Employers can now review how they provide death benefits.


For further information, please get in touch with Steven Hobbs or speak to your usual XPS Pensions contact.

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