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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United Kingdom | Publication | March 2023
The Chancellor’s Spring Budget announced on March 15, 2023, set out some of the most striking reforms to pension tax we have seen for several years. In this briefing we will examine the key changes facing the pensions sector and discuss what to expect in the coming months and beyond as the reforms are absorbed into the pensions landscape.
The most fundamental changes to be brought about as a result of the Budget will be to change the limits individuals can save into their pensions, both the amounts permissible in a given year and over the course of their working lives. After a number of years of gradually reducing these limits, this Budget sees somewhat of a U-turn, principally it seems in order to encourage older people back to the workplace. The Chancellor’s key aim was to ensure that highly skilled individuals, particularly senior NHS staff would not be disincentivised from re-joining the workforce but the changes will have wider implication for many employees, trustees and employers alike.
The cap on tax free annual pension contributions will increase from £40,000 to £60,000 per annum from April 6, 2023. The Spring Budget document confirms that workers’ unused AA from the previous three tax years can continue to be carried forward.
Money Purchase Annual Allowance (MPAA)
The MPAA (the tax-free amount an individual can contribute to their DC pension when they have already started to take their benefits) will increase from £4,000 to £10,000 per annum.
Tapered Annual Allowance (TAA)
The income threshold for the minimum TAA to apply has also been increased in the Spring Budget from £240,000 to £260,000 and the TAA itself will also rise from £4,000 to £10,000 per annum.
What will this mean in practice?
Clearly, these changes will be welcomed by all those wishing to save more into their pension. They may be particularly helpful for high earners wishing to continue/recommence contributing to active schemes. However, even for lower earners the changes bring substantial additional flexibility and the new thresholds provide the option of more tax efficient pension saving in almost all circumstances.
The increase in the AA may also assist trustees and sponsors undergoing the process of equalising GMPs or perhaps benefit restructuring exercises where the increased AA may reduce the number of people for whom certain benefit improvements or augmentations could have a negative tax consequence.
For DC schemes, administrators and trustees may experience a surge in member queries relating to the AA increase and an increase in requests from active members to make increased contributions in order to take advantage of the more favourable rate of tax-free allowance.
In the run up to the Chancellor’s Spring Budget it was rumoured that the LTA (the tax-free cap on the total amount an individual can accrue in pension benefits over the period of their lifetime) would increase from the current £1,073,100 to £1.8m. But arguably the biggest surprise from the Spring Budget from a pensions perspective was the Chancellor’s abolition of the LTA altogether. This will provide breathing space for those approaching the current LTA threshold and it hopes to incentivise earners to contribute more to their pension pots over the coming months and years.
The abolition of the LTA charge will come into force from April 6, 2023, and we can expect the LTA to be abolished in totality in April 2024 in the upcoming Finance Bill. HMRC has confirmed that schemes must continue with their usual LTA checks on members as the LTA framework will remain in place, so trustees and administrators are not entirely off the hook.
What about tax-free cash?
Although the LTA charge abolition will be welcome news for earners generally, the maximum tax-free lump sum individuals are entitled to on crystallisation of their pension benefits (the PCLS) has not been changed in the Spring Budget. The maximum tax-free lump sum (for those that do not have protection) remains at 25 per cent of the current LTA, £268,275, even post April 6, 2023. It is anticipated that the PCLS threshold will be gradually reduced over time although it is yet to be seen the rate at which this will occur. HMRC has confirmed that individuals with PCLS protections will retain these privileges provided certain conditions are met.
HMRC has also confirmed that lump sums previously subject to an LTA charge of 55 per cent (e.g. Serious Ill-Health Lump Sums or Defined Benefits Lump Sum Death Benefit) will from April 6, 2023, instead be taxed at the recipient’s marginal rate.
What will this mean in practice?
Some practical considerations include:
Away from the tax threshold changes, the Chancellor announced two key measures the government will be taking in order to encourage pension fund investment in UK companies. The measures are designed specifically to apply to DC pension schemes and the Local Government Pension Scheme (LGPS). In particular:
Little detail is available on these measures at the time of writing. We do know however that the DC proposals will involve the government engaging with industry and regulators with further information due on what this means in Autumn 2023. A consultation is expected shortly in relation to the LGPS targets.
The Spring Budget has given a notable shake up to the current pensions tax regime and we await full detail of the changes when the Finance Bill 2023 is published.
Those likely to benefit the most from the Chancellor’s reforms will be high earners and older individuals wishing to return to the workforce but there is something for everyone and the new regime will reduce the circumstances in which pension pots are taxed both on contributions in (AA) as well as benefits paid out (LTA).
Trustees, employers and scheme administrators should anticipate a higher volume of enquiries from members about how they can take advantage of the reforms and employers that offer matching contribution rates may find that the Chancellor’s incentives encourage earners to increase pension contributions to their DC arrangements, in turn increasing employer contributions.
Whilst it seems many workers, trustees and employers may be likely to welcome the change, the Labour party has roundly rejected the Chancellor’s reforms. As such, the new regime might be short lived depending on the results of the next general election.
Publication
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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