What impact will the 2023 Spring Budget have on pensions?

Perhaps the biggest surprise in the Budget was the scrapping of the Lifetime Allowance (LTA), but this was accompanied by the raising of various limits on pension tax relief – mainly the Annual Allowance and Money Purchase Annual Allowance (MPAA). While these announcements appeared aimed at those thinking about an early retirement to prompt them to reconsider their plans, it may also have a big impact on those who are still in work as they are now incentivised to build up bigger pensions.  

Impact of the Budget on clients in the retirement phase 

The Budget is great news for retirees as the rise in the tax-free element of the annual allowance, and the increase of the threshold for continued tax relief on pension contributions after they start drawing their retirement income, is expected to go a long way in helping them to reach their goals.  

A lot has also been said about the State Pension age which is due to increase to 67 in 5 years’ time (although the rise to 68 has now been delayed). But if we are all expected to work longer, and with life expectancy increasing, it is not unthinkable that the age at which people can access their pension pots - a key reform of the Pension Freedoms (currently 55 and 57 from 2028) - may yet be increased again in the not-too-distant future. The reason for this being that, as generation Defined Benefit (DB) makes way for generation Defined Contribution (DC), retirees are required to manage their pension investments themselves (with the help of a financial adviser). With DC pensions becoming the mainstay of people’s retirement wealth over time and with the investment risk sitting with them, it is important investors understand the implications of this.  

From a financial planning perspective, it is crucial that advisers seriously consider longevity risk. The number of people over the age of 65 in the UK is set to increase by 1.1 million this year according to the ONS. Getting planning wrong could be catastrophic for clients. Therefore, independent advice, coupled with the right tools and retirement products, is required to ensure investors are better able to manage their retirement risks.  

Impact of the Budget on clients in the accumulation phase 

For workers, where they may have been unable to contribute to their pensions because of the tax implications of breaching the LTA limit, they can now carry forward up to three years in unused contributions and pay the maximum annual allowance from April. 

With the new Annual Allowance, investors will now be able to pay up to £60k into their pension each year without any tax implications. With the increasing threshold, there is more scope for clients to increase their contributions and presents different options for retirement planning such as retiring earlier or being able to have a more comfortable lifestyle in retirement. This may require advisers to reassess individual client’s plans and also ensure their retirement proposition offers the options their clients need. 

How does this affect your retirement advice? 

It’s clear that the Budget will change the advice given to clients as some of the restraints on current models have been adjusted. In the short term, having seen the news, clients will want to understand what impact the changes will have on their saving habits and how their retirement plans should be adjusted. Longer term, your best practices, models, and possibly your entire centralised retirement proposition will all need to be assessed to determine whether they are likely to deliver the best client outcomes. 

Navigating a regulatory landscape undergoing significant change and offering the best advice and outcomes for clients can be difficult for advice firms of any size. When reassessing your approach to retirement advice, it may be beneficial to work with a partner that can offer knowledge from across the advice industry to develop a solution that works best for your business and your clients. 

Important information

This is a marketing communication, intended for professional investors only. Not for use by retail investors. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy.  The value of investments and the income from them may go down as well as up and you may not get back the amount originally invested.