Summary of the key changes from 6 April 2023

• Lifetime allowance (LTA): nobody will face an LTA charge.
• Annual allowance (AA): this will increase from GBP 40,000 to GBP 60,000. The adjusted income level required for the tapered annual allowance to apply to an individual will increase from GBP 240,000 to GBP 260,000. The Money Purchase Annual Allowance, which applies where an individual takes advantage of the 2014 DC flexibilities, will return to its previous level of GBP 10,000.
• Tax-free cash: the amount of pension commencement lump sum an individual can take at retirement will stay at the current level of GBP 268,275 (25% of the current LTA), except where tax protections apply that allow an individual to take a greater amount.
• Change to taxation of other lump sums: certain lump sums (for example, serious ill-health lump sums and defined benefits lump sum death benefits), which would previously have been impacted by the LTA tax charge at 55%, will now be taxed an individual's marginal rate.

What do the changes mean?

The full detail of the changes has not been set out, but based on current information these are some considerations for employers and trustees:

• Do the LTA protections still matter given the abolition of the LTA? Yes, as they will continue to enable employees with relevant protection to take a greater tax-free cash amount than they would otherwise be able to do under the new regime. Importantly, the protections will continue even if employees accrue further benefits.
• Will auto-enrolment requirements change? Employees with tax protection are exempt from the obligation to be auto-enrolled. This exemption will no longer be relevant from a policy perspective under the new regime as employees with relevant LTA protection will be able to continue to accrue benefits, and so it will be interesting to see if changes are made to this in due course.
• Members receiving cash in lieu of pension contributions: Some employers pay employees cash in lieu of pension contributions for those affected by the LTA or AA. As the changes will remove the main driver for these arrangements in relation to the LTA, employers will need to consider whether to continue, vary or terminate these arrangements. If employers want to terminate them, for example, to provide consistent benefits across the workforce, they will need to check if employees' agreement is needed to do that under the terms. Also, if the Government does change the automatic enrolment provisions, then employers might want to terminate the cash-in-lieu benefit so it does not look like an inducement for employees to opt-out.
• Are there scheme benefit design implications? Some pension plans limit benefits by reference to either the LTA or the AA, so employers and trustees of these plans will need to review the plan rules and consider the implications of the changes. The Government is introducing the measures so that while there will be no LTA charges from 6 April 2023, the actual LTA itself will not be removed from legislation until 6 April 2024, and so the specific drafting of plan rules (and the implications of this sequencing) will need to be checked carefully where they do refer to the AA or LTA in order to understand the impact at 6 April 2023 and again at 6 April 2024.
• Are excepted group life plans still relevant? We expect they will still have some relevance, at least in the short term whilst the LTA continues to apply. This is because tax at an employee's marginal rate will apply if they exceed the old LTA under the new regime, so while this is less than 55%, there will still be some tax payable, meaning that employers may still want to offer the plans for those individuals. Currently, it is not clear if the marginal rate charge will continue to be relevant after 6 April 2024 once the LTA itself is abolished.
• Does this solve the tax issues with GMP conversion? The tax issues aren't completely removed, but they are significantly lessened. The increase to the AA threshold could mean that fewer employees would have an AA charge as a result of GMP conversion. Additionally, while conversion would previously have resulted in the loss of enhanced or fixed tax protection, this will no longer be the case.

Next steps

As an immediate next step, trustees and employers should be ready to respond to increased member queries in this area, particularly from members who may be wishing to re-enrol into an available pension arrangement or who are about to retire.

Benefit arrangements that were designed around the LTA or AA should also be reviewed to check whether amendments are needed, in particular amendments to pension plan rules.

One further political consideration is the fact that the Labour Party is opposed to the changes to the LTA, so the potential for the limit to be reintroduced, either at the same or a different level, should also be factored into decision-making.

If you have any questions on the issues mentioned in this alert, please get in touch with your usual Baker McKenzie contact.