News & events

After a several quiet (ish) years it’s been a tumultuous time in the tax world with much change from Budget 2021 through to Budget 2023. With millions of new taxpayers, increased tax allowances, changes to corporation tax, increased Annual Allowances and the abolition of the Lifetime Allowance, it has been a busy period.

Lifetime Allowance

Following on from the early reactions to the welcomed increase of the allowances announced in the budget, many are taking a watchful waiting approach to the abolition of the Lifetime Allowance (LTA), given the upcoming election and Labours changing stance on the subject.

In recent weeks a number of additional changes have been proposed which you may have seen in the press. Whilst these require further consultation, the main proposed changes detailed in the draft legislation, which would apply from tax year 2024/25, are:

The lifetime allowance will be abolished. All tax-free lump sums, including tax-free lump sum death benefits will instead be tested against a lifetime limit, set at £1,073,100 (an individual’s ‘lump sum and death benefit allowance’). Any lump sums paid above this level will be taxed at the individual’s or beneficiaries’ marginal rate of income tax. If it’s paid to a trust it will be taxed at basic rate income tax, unless paid outside of the two-year period when it will be taxed at 45%.

Within that overall limit, there will be a tax-free limit for pension commencement lump sums and the tax-free element of uncrystallised funds pension lump sums, trivial commutation lump sums and winding-up lump sums. This tax-free limit will be known as the ‘lump sum allowance’. This will be set at £268,275 (which is equivalent to 25% of £1,073,100) or any higher protected amount.

Those with protection and therefore a higher personal lifetime allowance will retain any right to their higher level of tax-free lump sum.

However, a deadline of 6 April 2025 is being proposed for those applying for fixed protection 2016 or individual protection 2016.

From 6 April 2023, an individual who approved enhanced protection or fixed protection, can have a ‘protection cessation event’ such as a contribution made to a money purchase scheme and not lose their higher tax-free cash. This offers greater opportunity for pension savings for those who may have large defined benefit valuations and higher earners who may wish to use contributions for potential tax advantages.

Individuals who have enhanced protection with lump sum protection registered on their certificate will still be entitled to higher tax-free cash. The value of their maximum lump sum will be based on the same percentage of their benefits value at crystallisation as it was on 5 April 2006. However, the percentage is applied to the lower of:

• their total benefits value on 5 April 2023, or

• their total benefit value at crystallisation.

This means any contributions made on or after 6 April 2023 will not lose their protection (if enhanced protection applied for before 15 March 2023) but will not be included when calculating their tax-free cash.

For those who have a valid enhanced protection without registered tax-free cash or fixed protection that applied before 15 March 2023, any contributions the individual makes from 6 April 2023 can be included for the purposes of calculating their tax-free cash.

Mansion House Speech

During the Mansion House speech on 10 July 2023, Chancellor Jeremy Hunt set out his ‘Mansion House Reforms’, a substantial package of measures aimed at enabling the financial services sector to increase pension and other investment returns for people across the UK and boost the supply of investment capital available to support the growth of high potential businesses across the UK economy.

Chancellor Jeremy Hunt announced plans to support the development of ‘businesses of the future’ in the UK in what is named as the Compact Agreement. This agreement is with some of the UK’s major investment groups and the proposal is for pension funds to invest around 5% of funds into early-stage businesses. The Compact is a voluntary, industry-led expression of intent to take meaningful action to secure better outcomes for UK pension savers through increased investment in unlisted equities.

Several of the UK’s largest DC pension schemes – namely Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G & Mercer – signed up to the “Mansion House Compact” in which they committed to the objective of allocating at least 5% of their default funds to unlisted equities by 2030 if this was in the interests on members.

The desire to improve outcomes for members at retirement has been high on our own agendas for a long time and encouraging members to engage with their pension planning and consider their investment choices is a key part of proposition.

History has illustrated the impact of higher risk fund holdings on end portfolios. However a number of factors should be taken into account, with the introduction of high(er) risk investing within a default fund, not least of all the age demographic of a scheme. Trustees and managers of DC schemes are under a duty to act in the best interests of their scheme members and will now consider private equity in the range of investments, for the benefit of their members.

The morning after the speech the DWP and FCA published a number of consultations, all in some way connected to one of the Mansion House themes, the key pension related papers were:

• Value for money a framework on metrics, standards and disclosures
  The three key metrics of the value for money framework include a) investment performance b) administration costs and charges c) quality of service. The initial audience of the framework will be professionals who oversee workplace default arrangements including trustees IGC's and providers, although advisors and employers will have an interest and in time the audience will also include savers.

• Ending the proliferation of deferred small pots
  Deferred pots valued at less than £1,000, where there has been no contribution for 12 months, will be in scope for the automated automatic consolidation process. The £1,000 maximum pot level will be reviewed at ‘regular intervals’ so likely to rise in future.

• Helping savers understand their pension choices (which draws on the FCA investment pathways: post implementation review)
  This provides the Government with feedback on the products and services element of a previous call for evidence, plus a further consultation on a support framework. A second element around information, guidance and communications will follow.

• Extending opportunities for collective defined contribution pension schemes
  The DWP is taking forward its plans to extend Collective Defined Contribution (CDC) to multi-employer and decumulation only models. CDC allows trustees to take a longer investment look as there is a single investment pool without daily pricing so is seen as more likely to lead to investment in illiquids such as UK private equity. It anticipates CDC being offered by commercial entities and possibly by groups of employers. DWP is liaising with FCA and PRA to explore any capital requirements it should impose, although as trust- based, CDC would not be subject to Solvency II. It will also look into consumer protection as unlike annuities, CDC would not be covered by the FSCS. It wants to strike the right balance between consumer protection and avoiding a disproportionately burdensome regulatory regime for providers.

• Pension trustees skills, capabilities and culture
  The DWP is looking to deepen its evidence base around trustee capability and barriers to trustees doing their job to deliver the best outcomes for savers. Much of the focus is on whether trustees have the right knowledge and skills to consider the full breadth of investment opportunities, linking to the Government’s wider agenda for pension schemes to invest in productive finance, and links to the VFM Framework and consolidation agenda. The concern is that some trustees, especially those of smaller schemes, are unaware of their duties and obligations or knowledge of alternative assets as a scheme investment option. TPR is proposing a register of all trustees, and for every trustee body to have a minimum proportion (or all) of accredited trustees. TPR is considering imposing higher standards on professional trustees e.g. via accreditation.

There were other papers looking at defined benefit schemes.

The package of proposals, alongside ongoing work on pension dashboards and enhancements to auto-enrolment, could significantly change the whole UK pensions landscape. There is no timetable for implementing these changes and most if not all will require legislation so won’t take effect until after the next General Election. However, there is no reason to believe a Labour Government would take a fundamentally different approach and indeed could seek to go further, faster. The industry are calling on the Government to set out a roadmap clearly showing which might be implemented first and when.

The Chancellor wants to announce policy decisions in his Autumn Statement and the deadline for consultation responses was set as 5 September, so we should hear further details shortly.

Automatic Enrolment

You may recall earlier this year a Private Members Bill was put forward by Baroness Altmann and Jonathan Gullis MP, which was backed by the government. This granted two extensions to Automatic Enrolment – abolishing the Lower Earnings Limit for contributions and reducing the age for being automatically enrolled to 18 years old. This Bill has now received Royal Ascent. When a Bill has completed all its parliamentary stages in both Houses, it must have Royal Assent before it can become an Act of Parliament (law). Most provisions in an act will either come into operation within a set period after Royal Assent (commonly two months later) or at a time fixed by the government. This gives the government and those people who are directly affected by the act time to plan accordingly. The government may need to fill in some of the details of the new scheme by making regulations or orders under powers contained in the act, for example to deal with procedural matters.

The intention is that the provisions in this Bill will not result in any immediate change but will give the Secretary of State powers to amend the age limit and lower qualifying earnings limit for Automatic Enrolment. Employers should now consider how this may affect their total workplace pensions cost. We will however provide further information in future bulletins as soon as details are available.

The information provided in this briefing is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.