Budget 2023 : Important UK Pension Update

By Martin Rimmer, Managing Director, Spice Taxation

Many were expecting some sort of relaxation of the tax regime on pensions in Jeremy Hunt’s Spring Budget on 15th March. To our great delight, he didn’t disappoint. However, the changes have thrown up one important consequence on which action may be required by British expatriates, potentially urgently.
 

What are the changes and why are they good news?

The Chancellor is introducing five changes. The first four of them are good and the last is not so good, but the last one is where an opportunity potentially exists for you.

First, he is abolishing the Lifetime Allowance Charge. The Lifetime Allowance is the amount of UK pension benefits on which you can enjoy tax relief and it is presently set at GBP 1,073,100. If the total of your pension savings exceeds this, the Government had the right to charge the excess to Income Tax at a rate of 55% (if drawn as a lump sum) or at a rate of 25% (if taken as a taxable income). It is this charge that is being abolished from 6th April 2023, which is profoundly good news!

Secondly, he is increasing the Annual Allowance. This is the amount that can be invested into a UK pension scheme per year, and it will rise from GBP 40,000 this year to GBP 60,000 next year. Most British expatriates can’t contribute to UK pensions whilst they are non-resident, but some can contribute in certain circumstances.

Thirdly, where ‘adjusted income’ (broadly, UK taxable income) is more than GBP 240,000, the amount of the Annual Allowance starts to reduce. That threshold will increase to GBP 260,000 from 6th April 2023.

Fourthly, he has also decided to increase the Money Purchase Annual Allowance (a specialised allowance for those who have already accessed certain pension benefits) from GBP 4,000 this year to GBP 10,000 next year.

Fifth, many will know that it has been possible to take 25% of the value of your pension benefits as a tax-free lump sum or income. However, the Chancellor has decided to restrict this relief for larger pension sizes. The maximum amount that a person can take from UK pensions tax-free will be GBP 268,275 or 25% of whatever Lifetime Allowance Protection you have in place, whichever is higher.

What is Lifetime Allowance Protection?

When the Lifetime Allowance Charge was introduced around 10 years ago, the Government decided to allow people to ‘protect’ large existing pension pots from this charge. It did this by introducing a number of ‘protections’ set at different levels over a period of years. Currently it is only possible get ‘Fixed Protection 2016’ for GBP 1.25m, whether your pensions are worth this amount or not.

So, one implication of fifth change above is that if you don’t already have Protection in place for your pension benefits, the most you can draw tax-free eventually is GBP 1,073,100 x 25% = GBP 268,275. If you get Fixed Protection 2016, this will rise to GBP 1,250,000 x 25% = GBP 312,500. If you are eligible to apply for this protection, doing so will take up to GBP 44,225 out of Income Tax over time, potentially saving Income Tax of as much as GBP 19,900.

Is Fixed Protection right for you?

There are pros and cons in getting Fixed Protection. Locking in the higher tax-free amount is obviously a benefit. However, to be eligible you cannot have contributed to UK pensions from 6th April 2016 and you must ensure that no further contributions are made to UK pension schemes (voluntary National Insurance Contributions for the State Pension excepted) going forward. This might not be the right answer for you. But, equally, you might in a perfect position to benefit.

The Call to Action

So, the call to action is to check whether or not you have Protection in place on your existing UK pension rights. If you do, brilliant, no further action needed. If you don’t (or you don’t know), you should take some advice about whether Fixed Protection 2016 is right for you. The application process is very straightforward.

The Government hasn’t confirmed if and when it will remove the right to take up ‘Fixed Protection 2016’ but it is best to act sooner rather than later in case they remove this at short notice in the future.

So, if we are going to think about your existing pension rights, let’s also think about your National Insurance position and whether you would benefit from making voluntary contributions. There is a 31st July 2023 deadline to made extended back payments for this, by the way. Let’s also look at how you expect to fund your retirement overall and do some modelling about the best planning options to keep Income Tax, Capital Gains Tax and Inheritance Tax as low as we can.

As an independent tax adviser based in Singapore, Spice Taxation can help you in all of these areas. We can guide you fully and impartially on what is best from a UK tax perspective, we can advise you about how to prepare for a tax-efficient return to the UK (if you wish to do that) and we can do some solid modelling to give you a sense for your financial trajectory up to and throughout retirement.

Spice Taxation is not a financial adviser. So, contact us today for an exploratory chat which will focus only on your UK tax planning, at no charge or obligation.