The pensions taxation changes announced in the Budget along with previously announced flexibilities and scheme amendments go a long way to resolving the problems.

Jeremy Hunt announced dramatic changes to pensions taxation in his 15 March 2023 Budget. His apparent motive was to help the senior NHS workforce – preventing them from retiring early or working less due to the disincentives created by annual and lifetime allowance (LTA) charges. The Chancellor, however, decided to extend the tax benefits to everyone and, by abolishing the LTA entirely, went much further than anyone expected or was necessary than required to solve the problem.

The Labour party have instantly hit back with a commitment to reverse the LTA changes but, crucially, they have singled out NHS workers as an exception. We will have to see exactly what they mean in terms of that and now focus on the immediate changes.

Higher earning NHS consultants and GPs have been hit with the double whammy of both regular annual allowance charges and the prospect of LTA charges when they come to take their benefits.

Clearly, the abolition of the LTA resolves one of these issues entirely. They can now build up as much pension as possible without fear of an LTA charge. The change removes a significant disincentive to continue working.

However, the annual allowance was always the bigger issue. The increase from £40,000 to £60,000 will definitely help with the problem and ensures many consultants and GPs will not have to face regular annual allowance charges. There are still likely to be spikes in pensions inputs about the annual limit caused by the NHS pay scales and whenever they take on additional pensionable responsibilities. The higher annual allowance coupled with, as time goes by, potentially more carry forward available, should, however, mean that annual allowance excesses are far less frequent. To breach the £60,000 annual allowance in a defined benefit scheme would mean an above inflation pension increase of over £3,750 in a year, which is a considerable sum to accumulate with the full tax advantages.

For very high earners there is still the issue of tapering. However, the increase in the Adjusted Income limit will move more NHS workers out of scope. Everyone will have a higher annual allowance with the increase in the minimum tapered annual allowance to £10,000 if adjusted income reaches £360,000 or more. Many NHS workers in this bracket are likely to have an element of private earnings and in many cases can control their level of taxable income by using limited companies to perform their private duties.

In addition to the changes announced in the Budget we have also recently seen new retirement flexibilities confirmed and technical changes to resolve some pension input issues caused by inflation. These are covered in detail in our recent Bulletin.

The ability to take pension benefits from the 1995 section of the scheme at age 60 and continue to accrue benefits in the 2015 scheme without fear of an LTA charge really should provide a great incentive for doctors to avoid retiring at 60. Whether the tax benefits in themselves are enough to keep the workforce motivated and working when, in many cases, they will already have a comfortable pension built up is another question.

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The Resolution Foundation has joined the Institute for Fiscal Studies in calling for a cap on the pension commencement lump sum.

Earlier this month, the Institute for Fiscal Studies (IFS) published a report on the taxation of pensions which proposed for a reduction in the maximum pension commencement lump sum (please see our earlier Bulletin). Now the Resolution Foundation has joined in the cash-cutting call in a new paper, ‘Post pandemic participation’. As the title suggests, the focus is on workforce participation in the wake of the pandemic. The employment rate for 16-64-year-olds is down from 76.6 % in December-February 2020 to 75.6% in the final three months of 2022.

The report has three key proposals related to pensions, all aimed at encouraging continued labour force participation among older workers:

1. Minimum pension age. The paper notes that the Government’s emphasis on State Pension Age (SPA) ‘has led to the incoherence of the past decade, with politicians raising the SPA (delaying retirements for those on lower incomes with lower longevity) while proactively making it easier to access tax-relieved private pension wealth (disproportionately held by richer households with longer longevity) earlier.’ To address this, the paper says that ‘Policy makers should consider further raising [the minimum pension] age, or at least slowing the rate at which money can be withdrawn before SPA.’
2. Pensions commencement lump sum. In the paper’s view, the pension commencement lump sum ‘encourages early retirements far before the SPA for wealthy individuals, at considerable expense to the taxpayer.’ A cap is proposed, but no numbers are given.
3. Defined benefit schemes and employment re-entry. Some defined benefit (DB) pension schemes (e.g. the civil service pension scheme for those who were members before April 2015), have ‘abatement’ rules which can result in the pension of a retiree being reduced if they are re-employed. The paper regards this as an active discouragement to returning to employment which should be addressed.

Comment

Our immediate thoughts are much the same as those we had on the IFS paper – these might be logical policies, but it will be a brave politician that proposes them anywhere near a general election.

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Following recent announcements from Michael Gove in the Press and in an interview on Sky, saying that he wants to abolish the leasehold system, he has now provided a formal update to Parliament

Back on 7 January 2021, Robert Jenrick, the then Housing Secretary, announced that leasehold reform would be tackled through two pieces of legislation Please see our earlier Bulletin.

The Leasehold Reform (Ground Rent) Act 2022 came into force on 30 June 2022. This Act fulfilled the commitment to “set future ground rents to zero.” The provisions apply only to new lease agreements. New leases of retirement properties are in scope, but not before 1 April 2023.  

According to the latest Parliamentary update, on 20 February 2023, Michael Gove, Secretary of State at the Department for Levelling Up, Housing and Communities said:

“We hope, in the forthcoming King’s Speech, to introduce legislation to fundamentally reform the system. Leaseholders, not just in this case but in so many other cases, are held to ransom by freeholders. We need to end this feudal form of tenure and ensure individuals have the right to enjoy their own property fully.”

According to the update, future legislation will also:

• Reform the process of enfranchisement valuation used to calculate the cost of extending a lease or buying the freehold.
• Abolish marriage value.
• Cap the treatment of ground rents at 0.1% of the freehold value and prescribe rates for the calculations at market value. An online calculator will simplify and standardise the process of enfranchisement.
• Keep existing discounts for improvements made by leaseholders and security of tenure.
• Retain the separate valuation methodology for low-value properties known as “section 9(1)”.
• Give leaseholders of flats and houses the same right to extend their lease agreements “as often as they wish, at zero ground rent, for a term of 990 years”.
• Allow for redevelopment breaks during the last 12 months of the original lease, or the last five years of each period of 90 years of the extension to continue, “subject to existing safeguards and compensation”.
• Enable leaseholders, where they already have a long lease, to buy out the ground rent without having to extend the lease term.”

(‘Marriage value’ assumes that the value of one party holding both the leasehold and freehold interest is greater than when those interests are held by separate parties. This announcement means that marriage value will be removed from the premium calculation.)

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