Budget 2023: balancing caution with surprise
The Chancellor has clearly continued to learn from his immediate predecessor about the importance of managing expectations – while throwing in a surprise or two. But what could this mean for you?
Pensions take the top spot
So the ‘rabbit out of the hat’ moment is the abolition of the pension lifetime allowance (LTA). The LTA is the maximum pensions savings that an individual can benefit from during their lifetime, prior to being subject to the LTA tax charge of 55%, if withdrawing a lump sum, or 25% if drawing a taxable income. While rumours of a sharp increase in the allowance had been gathering momentum, the news of the abolition of this part of the tax regime was unexpected.
However, we urge extreme caution for anyone who has been fortunate to have protected their lifetime allowance at a previous higher level because Labour have suggested that they would reverse any changes. Any action that could jeopardise these valuable protections should be considered very carefully, i.e., making any additional contributions.
For many of us, the increase in the tax-relievable annual pension contribution limit, from £40,000 to £60,000, will also make a real difference to our long-term financial wellbeing. The restricted allowance, which applies where benefits are accessed in many situations, has been increased from £4,000 to £10,000. This at least provides some opportunity to rebuild pension benefits for the future.
We have for many years held the view that pensions are often a particularly attractive way to invest.
Why is that?
- Tax relievable contributions – at your highest marginal tax rate
- Income and capital gains tax-free returns within pension plans
- Usually no inheritance tax following death.
The removal of the lifetime allowance tax regime is now the icing on the cake.
We are still awaiting the full details, as ever the devil is likely to be in the detail. In the meantime, though, two aspects have caught our eye straight away:
- The changes are due to take effect on 6 April, so the lifetime allowance regime is very much still active at present
- A tax-free cash upper limit of £268,275 has been set (this is the amount up to which you can take a tax-free lump sum from your pension). This is 25% of the current lifetime allowance. Above this limit, lump sum withdrawals will be taxed at the individual’s marginal income tax rate, as is the case for regular income withdrawals. However, where one of the forms of pension protection is already in place, any entitlement to a higher level of tax-free cash remains. We are awaiting full details of how this complex area will work in practice.
While this latter point will mostly benefit higher earners, the government is presumably hoping this will encourage some of us to work longer and, in particular, encourage medical professionals to do so. However, the law of unintended consequences should not be ignored, and this could encourage more of us to retire early if we can accumulate more benefits in a shorter period of time.
Individual Savings Accounts remain key
The Individual Savings Account (ISA) allowance remains frozen at £20,000, and the Junior ISA at £9,000, which means a reduction in the real value of these tax breaks. Despite this, we would still consider these to be a central part of any tax-efficient savings and investment strategy, given the opportunity to also save in an environment free of income tax and capital gains tax (CGT).
With a reduction in the CGT allowance to only £6,000 for individuals from 6 April, as was announced last year in the Autumn Statement, investing within an ISA and a pension where appropriate becomes even more valuable in many situations.
Elsewhere, the increase in the main rate of corporation tax to 25% from 6 April has been confirmed, despite industry pressure. However, various tax reliefs have been introduced, with the stated intention of reducing the impact. There are also incentives to encourage new parents back into the paid workforce.
Is it time to take advantage of the saving incentives?
The Chancellor was hugely constrained in what he could do in this budget. As such, he has focused on ‘supply side’ reforms to the economy, with the objective of providing more incentives to work and, for firms, to invest. Overall, it was a cautious budget and one we welcome for the additional incentive to save for a secure retirement.
This is a complex area, and everyone's situation is different. Before you think about making any changes to your pension plan – whether you are saving for retirement, at retirement or in retirement – it’s important to wait for the full details of the Budget to be released and to consider thoroughly the long-term implications with the help of your Financial Planner. We would urge you not to make any unplanned changes without first speaking to a Financial Planner who is qualified to give pensions advice and has experience in navigating the complexity presented by the UK pension rules and can apply this to your individual circumstances.
If you want to discuss your retirement plans, and how you might be able to take advantage of these changes, please get in touch as we have experts in our team who will be able to help you.
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The tax treatments set out in this communication are based on our current understanding of UK legislation. It depends on the individual circumstances and may be subject to change in future.
Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.
The information contained herein is based on materials and sources deemed to be reliable; however, Adam & Company makes no representation or warranty, either express or implied, to the accuracy, completeness or reliability of this information. All stated opinions and estimates in this document are subject to change without notice and Adam & Company is under no obligation to update the information.
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Investment involves risk and you may not get back what you invest. It’s not suitable for everyone.
Investment involves risk and is not suitable for everyone.