Articles - The impact the Autumn Statement had on pensions savings

 By Phil Duly, Associate and Head of DC Research & Technical at Barnett Waddingham

  

 Pension Allowances

 No changes were announced to the Annual Allowance (Standard - £40,000; Money Purchase - £4,000; and Tapered - £4,000 to £40,000) or to the Lifetime Allowance (Standard - £1,073,100). It therefore appears the Lifetime Allowance remains frozen at its current level until April 2026.

  

 Impact
 Individuals who dip into their pension savings to help manage the cost of living crisis should take care that they don’t inadvertently trigger the Money Purchase Annual Allowance (depends on how pension savings are taken), as this will severely restrict the amount of further pension savings they can build up.

  

 A growing number of pension savers will exceed the Lifetime Allowance and will become subject to the Lifetime Allowance Charge (55% if the excess is taken as a cash sum or 25% if it’s taken as income). Whilst employers will not know the total value of pension savings for employees, they may wish to consider support in this area, e.g. communications and provision for those approaching/exceeding the Lifetime Allowance.

  

 N.B. Pension savings are assessed against the Lifetime Allowance on access, on death before age 75 and on reaching age 75 with uncrystallised savings or with growth on crystallised (drawdown) savings.

  

 National Insurance
 The main (Class 1) NI thresholds will be frozen at current levels until April 2028. The scrapped NI increase/Health and Social Care Levy was not reinstated.

  

 Impact
 Pension salary exchange, through which an employee exchanges salary for higher employer pension contributions, delivers NI savings for employees and employers. Frozen thresholds will lead to increasing NI costs and the appeal of pension salary exchange. Employers who don’t offer pension salary exchange may wish to consider doing so. Employers that do but with low participation levels may wish to consider engagement or default participation.

  

 Income Tax
 Non-Scottish and non-Welsh taxpayers

 The Additional Rate Threshold (£150,000) will reduce to £125,140 in April 2023 and will be frozen at that level until April 2028. The Personal Allowance (standard £12,570) and all other Income Tax thresholds will be frozen at their current levels until April 2028.

  

 N.B. No change was announced to the reduction of Personal Allowance by £1 for every £2 that ‘adjusted net income’ exceeds £100,000. This exhausts the standard Personal Allowance for those with adjusted net income of £125,140 or more.

  

 Scottish and Welsh taxpayers

 Scotland sets its own rates of Income Tax and Wales has the power to do so (but has not diverged to date). The Scottish and Welsh Governments will publish their Draft Budgets in December.

  

 Impact
 The frozen thresholds will mean an increase in Income Tax, particularly for higher rate taxpayers. In addition, the lowering of the Additional Rate Threshold will see more higher rate taxpayers move into the 45% additional rate tax band. This increases the appeal of pension contributions for which tax relief is available at the full marginal rate.

  

 The reduction in Personal Allowance for adjusted net incomes between £100,000 - £125,140 results in a very high marginal rate of tax. This enhances further the appeal of pension contributions within this income band.

  

 N.B. Pension contributions (whether or not through salary exchange) can also be useful in reducing adjusted net income to combat the reduction to Child Benefit (tapered to nil over £50,000 - £60,000 where one parent has net adjusted income above £50,000) and the removal of eligibility to Tax-Free Childcare where one parent has net adjusted income above £100,000.

  

 State Pension
 The State Pension will increase in April 2023 with the Consumer Prices Index (in line with the ‘triple lock’), from £185.15 to £203.85 per week.

  

 N.B. The Chancellor announced a review of the planned increases to the State Pension Age is to be published in early 2023.

  

 Impact

 Uprating State Pension with inflation will retain the broad purchasing power of this element of retirement provision. However, the review of State Pension Age may bring forward the timing of planned increases, with consequences for pension savers who aspire to retire at an earlier age, i.e. funding retirement income over the intervening period.

  

 National Living/Minimum Wage
 The National Living/Minimum Wage levels will increase by some 10% (levels and increases vary by age group) in April 2023.

 Impact

  

 Employers operating pension salary exchange should consider reviewing any measures such as ‘pay protection’ thresholds and maximum exchange rates, designed to help ensure employees do not reduce earnings below statutory minimums.

  

 Inheritance Tax

 The Nil Rate Band (£325,000), Residence Nil Rate Band (£175,000) and taper arrangements (for estates worth more than £2million) will remain frozen at current levels for a further two years until April 2028.

  

 Impact
 Frozen thresholds will see an increasing number of death estates subject to higher Inheritance Tax costs. Keeping pension savings within the pensions ‘wrapper’, either as crystallised (drawdown) or uncrystallised savings, until needed for retirement income can help to shield these from Inheritance Tax.