Jacques Szemalikowski explains how announcements made in the Chancellor’s Spring Budget will affect members’ pensions.

Budgets, pensions, rabbits and retrofits

Last year in Leader, I quoted former US President Richard Nixon’s wisdom, “Make sure you pay your taxes; otherwise you can get in a lot of trouble.” Specifically, I was referring to the lifetime allowance (LTA) and the annual allowance (AA) tax charges on your Teachers’ Pension Scheme (TPS) or Local Government Pension Scheme (LGPS). You will recall these are limits placed by His Majesty’s Revenue and Customs (HMRC) on both the total tax-free amount you can accrue overall (LTA), and the tax-free amount by which your pension can grow every tax year (AA). 

Remember that these are public sector defined benefit (DB) schemes with no ‘pot’ of money. To calculate LTA and AA, HMRC uses an actuarial formula to capitalise various aspects of your pension to nominally equate it to a private pension pot. 

Looking at LTA first, in 2022/23 and the preceding three years, it was £1,073,100. Anything above that was taxed at 25% directly from your eventual pension. 

In his Spring Budget, the biggest rabbit pulled out of the Chancellor’s hat was the abolition of the LTA charge. 

Since 6 April 2023, no-one has to pay a lifetime allowance tax charge. For the avoidance of doubt, this cannot be retrofitted. LTA is chargeable at the point of accessing a benefit. Pensions accessed on or before 5 April 2023 were subject to the LTA charge; pensions accessed on 6 April 2023 onwards are not. What has not changed is the limit that you can access from all and any pensions as a tax-free lump sum, which is £268,275. 

However, there may well be situations where colleagues have more than one pension. In this case, you may find yourself having paid the LTA charge on a pension taken before this tax year but being exempt from the LTA charge on any second pension not yet taken. 

Crossing the threshold 

Moving onto the AA threshold, this has been set at £40,000 for the past few years, including 2022/23. Any annual pension growth, the pension input amount (PIA), above the AA threshold is taxed at your marginal rate. An increasing number of our members have been caught out by this over the past few years. Indeed, many have been surprised on seeing their Pension Saving Statement (PSS), provided each autumn, that they have breached the AA. 

The culprit here is inflation as measured by the Consumer Price Index (CPI). The valuable annual revaluation of your total pension benefits (CPI in the LGPS, CPI+1.6% in the TPS), is worked into the PIA formula. This is not a problem when inflation is low. When inflation is high, the protection it affords your pension can also cause it to breach the AA ceiling, even after subtracting permissible offsets from the previous three years. 

Interestingly, in the NHS pension scheme, revaluation is, to all intents and purposes, being decoupled from the PIA formula. ASCL Council in February 2023 produced a position statement arguing for members’ pensions to be aligned in the same way. After all, the retention crisis that prompted action in the NHS scheme is equally present for school and college leaders. You can read the position statement at www.ascl.org.uk/ConditionsEmployment 

Looking ahead though, there is some good news. In the Spring Budget, the annual allowance threshold for 2023/24 was raised to £60,000. That will undoubtedly help our members going forward. 

Interestingly, further relief may well come from the Public Service Pensions (McCloud) Remedy. The proposal is that, as a default, TPS members will be initially rolled back into their legacy scheme for the remedy period 2015 to 2022 (there is a different and more straightforward remedy proposed for the LGPS). 

The legacy scheme had an accrual rate of 1/80 final salary for every year of service, revaluated with CPI. The reformed career average scheme has a higher accrual rate of 1/57 of actual salary, with a higher revaluation of CPI+1.6%. Clearly, pension growth and associated PIA will be higher in the reformed scheme. Consequently, the default retrofit will likely lead to a repayment of previous AA tax covering the remedy period. 

This in turn may well create more carry forward being available to deal with any breach in 2022/23. Consequently, PSS for 2022/23 are not likely to be available until well into next year. Watch this space. 

Jacques Szemalikowski
ASCL Conditions of Employment Specialist: Pensions
@ASCL_UK

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