Following the 2023 Spring Budget, new plans and restrictions are coming into place for the 2023/24 financial year that will directly affect Police Officers.
One of these areas is pensions, as the Government outlined new rules surrounding annual and lifetime allowances, some of which include:
- Lifetime allowance (LTA) charge to be abolished - the total amount you can build in all of your pension savings whilst enjoying full tax benefits
- Pension commencement lump sum (PCLS) - the tax-free cash on retirement - to be frozen at the current maximum of £268,275
- Annual allowance to be increased from £40,000 to £60,000
These changes will affect Police Officers. We spoke with Simon Horgan, one of our Police Pension experts and presenter at Metfriendly’s Options pre-retirement seminars, to get to grips with the changes that could affect your finances, as well as learn a bit more about what makes Metfriendly’s Pension “Myth-Busting” Webinars so useful for members of the Police Service. Here’s what he had to say.
Annual pension allowance increased
In the 2023/24 financial year, the annual pension allowance will be raised to £60,000 following nine years of freezing at £40,000. This change is one of the most significant for Police Officers and will be especially helpful to savers paying large lump sums into their pensions during the years leading up to retirement.
Simon commented: “Any increase is welcomed, but there’s a lot of confusion surrounding this. Some Officers think they aren’t affected because they didn’t pay £40,000 into their pension pot. However, it’s vital to remember that it’s an increase to the value of your pension, also referred to as the ‘transfer value’.
“The Inspector rank (and any above) could have been affected by the £40,000 allowance we’ve had for the last nine years, but the new £60,000 should come as good news to these Officers. Of course, it’s highly unlikely they’d have been paying anywhere near £40,000 into their pension schemes; however, it is those employer contributions that can lead to a breach of the limit.
“Your pension provider will inform you if you’ve breached your annual allowance. This is known as a Pension Input Period (PIP) and is what you must watch out for. There are two ways you can deal with a breach or, in other words, pay for the tax liability.
“One is to declare this through self-assessment by putting it on your tax return. The other is to elect for Scheme Pays. In this case, your employer pays the charge and automatically deducts a calculated sum from your pension every year upon your retirement. Of course, there are pros and cons for each of those options.
“So, the bottom line is that it’s a welcome change and hopefully will save quite a few Officers money if they’re paying on their tax return. If they elected for Scheme Pays, it will affect their benefits later in life, as debits are deducted before calculating lump sums.”
Lifetime Allowance to be abolished
The Lifetime Allowance (LTA) charge is set to be removed from April 2023, whilst the complete abolition of the LTA will be announced at a future date. Put simply, this means there won’t be a cap on what your pension can be worth to enjoy the full tax benefits.
is 55% if you take it out as a lump sum. If taken as income, there is a 25% charge, and the remainder is subject to income tax. The new changes mean you won’t pay these rates anymore, but we will have to wait and see how this will be treated.
However, as Simon mentioned, there is some confusion surrounding what this change means precisely for the Police: “You need to understand that the amount you can withdraw tax-free is the lower of 25% of the value of your pension or 25% of the current LTA, which is 25% of £1,073,100. This could be higher if you have previously applied for protection of the LTA.
“Therefore, if you exceed the LTA, you’ll be restricted by the Pension Commencement Lump Sum (PCLS) of £268,275. If you do not exceed the LTA, it would be 25% of the current value.
“So, Police Officers who have exceeded their current LTA would have a restriction in terms of the PCLS, which would be £268,275. Of course, you can take more, but this would incur a tax penalty. Finer details are sure to follow, and Metfriendly will provide an update as soon as information is available.
“This may differ for Officers who have protected their pensions previously. But don’t get caught out by thinking you can withdraw 25% of your whole pot tax-free."
The abolishment of the LTA is still due to be passed through Parliament, but the current penalty rates for withdrawing money from your pension pot have been removed. This means that Police Officers will be able to grow their pension pots even more.
Busting pension myths
The Pension Myth-Busting Webinar is delivered by Simon Horgan alongside Paul Turpin, Metropolitan Police Federation Pension Lead.
Simon added: “Pensions have become very complicated. The Police Officer pension was never that straightforward, but traditionally, Officers retired with just one. Now, we see plenty of people retiring with two or three, and they all have different rules. There are so many myths flying around that stem from rumours and canteen culture, so we decided we need to bust them!”
Metfriendly’s Myth-Busting Webinars give a complete overview of everything you need to know, from the pension schemes Officers may be in and calculating lump sums to when you can withdraw from your pot and tax implications. Sessions also include topical information, such as the spring Budget and the McCloud remedy.
For more information on Pension Myth-Busting Webinars and dates for the next sessions, head to our Events page.