Budget 2023: Changes to Pension Rules Encourage People to Stay in Work Longer
In his Budget speech on Wednesday, Chancellor Jeremy Hunt announced a series of changes to pension rules in the UK. These are designed to encourage NHS doctors and other high earners to remain in their jobs for longer, as well as to mitigate the risk of people accessing their money purchase (or DC) savings and re-investing them into pensions to benefit from tax relief.
The government plans to scrap the lifetime allowance on pensions – the total amount of money a person can draw from pensions – and increase the annual allowance from £40,000 to £60,000.[0] This amount is the most you can save in your pension pots in a tax year (6 April to 5 April) before you have to pay tax.[1] The money purchase annual allowance (MPAA), which is designed to stop people who have already dipped into their pension from recycling this cash and benefiting from double tax relief, will rise from £4,000 to £10,000.[2]
The measures are estimated to cost over £1 billion over the next five years.[3] [4] Shadow Chancellor Rachel Reeves has labelled it a “tax cut for the richest one per cent” and promised to force a vote on it next week.
The changes amount to a huge inheritance tax break, as pensions can usually be passed on free of inheritance tax. The abolishment of the lifetime allowance will also allow people to shelter more money from inheritance tax.
The government has said that the changes are necessary to prevent senior consultants from retiring early from the NHS because of the current pension rules. The Treasury spokesperson said: “With lots of people on NHS waiting lists, we need to move quickly – that’s why we’re implementing pension reforms in a matter of weeks to help keep experienced doctors and consultants in our NHS.”[5]
Budget 2023 saw a range of changes to pension rules, some of which will come into effect as soon as April. These changes are designed to encourage people to remain in work for longer, whilst taking advantage of the tax perks for doing so.[6] Whilst some are welcoming the changes, Labour has said it will reverse the “pensions bung for the 1%” if it wins power, with Shadow Chancellor Rachel Reeves labelling it a “tax cut for the richest one per cent”.
0. “UK Treasury Gives Rich People £75,000 a Year to Keep Working (1)” Bloomberg Tax, 16 Mar. 2023, https://news.bloombergtax.com/daily-tax-report-international/uk-treasury-gives-rich-people-75-000-a-year-to-keep-working-1
1. “Martin Lewis highlights ‘important' pension change that was not mentioned by chancellor” Manchester Evening News, 16 Mar. 2023, https://www.manchestereveningnews.co.uk/news/cost-of-living/martin-lewis-highlights-important-pension-26486747
2. “Reforms to pension tax rules set to give savers a boost – Which? News” Which?, 15 Mar. 2023, https://www.which.co.uk/news/article/reforms-to-pension-tax-rules-set-to-give-savers-a-boost-aOnUI8V8OkUE
3. “‘Wrong priority': Labour pledges to reintroduce pensions allowance” City A.M., 16 Mar. 2023, https://www.cityam.com/wrong-priority-labour-pledges-to-reintroduce-pensions-allowance/
4. “Question Time Audience Member Burns Tory MP Over ‘Pensions Bung For The 1%'” HuffPost UK, 16 Mar. 2023, https://www.huffingtonpost.co.uk/entry/bbc-question-time-lifetime-pensions-allowance_uk_64138544e4b0cfde25c3e104
5. “Ministers expected to raise state pension age weeks after tax handout to super-rich” The Mirror, 18 Mar. 2023, https://www.mirror.co.uk/news/politics/ministers-expected-raise-state-pension-29494081
6. “Was it right to raise the pension annual allowance?” The Times, 18 Mar. 2023, https://www.thetimes.co.uk/article/was-it-right-to-raise-the-pension-annual-allowance-xxtntbxqq
