Pensions experts are reacting to the opportunities and complexities thrown up by the Chancellor’s abolition of the LTA, with a £9m pension pot now a potential reality and recycling made easier, but further complexity for those advising clients.
The Lifetime Allowance (LTA) charge will be removed from 6 April 2023 before fully abolishing it in a future Finance Bill. The maximum Pensions Commencement Lump Sum (tax-free cash) for those without protections will be retained at its current level of £268,275 and will be frozen thereafter.
The government will increase the Annual Allowance from £40,000 to £60,000 from 6 April 2023. Individuals will continue to be able to carry forward unused Annual Allowances from the three previous tax years.
The Money Purchase Annual Allowance (MPAA) will be increased from £4,000 to £10,000 and the minimum Tapered Annual Allowance from (TAA) £4,000 to £10,000 from 6 April 2023. The adjusted income threshold for the TAA will be increased from £240,000 to £260,000 from 6 April 2023.
Open and closed public service pension schemes for a given workforce will be considered linked for the purposes of calculating Annual Allowance charges, allowing members to offset any negative real growth for Annual Allowance purposes in legacy public service pension schemes against the Annual Allowance, This will be legislated for through secondary legislation and will apply from the April 2023 tax year.
Aon partner and head of UK retirement policy Matthew Arends says: “Potentially, the group of higher paid employees might decide to retire from one of their pension schemes and recycle pensions income back into a second pension – the Money Purchase Annual Allowance (MPAA) is equal to the tapered AA for this group, so protections against recycling pensions don’t work for this group. This is not a new issue but the higher MPAA/TAA makes it more meaningful.
“Building up a pension from contributions of £60k a year over a lifetime would enable an individual to build up a very considerable pension pot. Clearly, they would need to be able to save £60,000 each year to do it but if they could the ultimate pot, with returns, could be a multiple of the current LTA for example of the order of £9m, before allowing for the effects of inflation. This is £60,000 x 40 years x 1.07^20 returns = £9.3m.”
De Vere Group CEO Nigel Green says: : “Beyond the headline-grabbing statement, the detail has served only to make an already highly complex regime even more so, meaning those wishing to take advantage of this new development should seek advice in the first instance.
“The Budget has underscored the need for those looking to protect and maximise their nest eggs to seek professional advice.
“Whilst the Chancellor’s announcements are something we champion, the system has just become considerably more complicated. A much-needed wider review of the pension tax regime, which has become increasingly and unnecessarily complex in recent years, is long overdue and should have also been a priority for Mr Hunt.”
Matthew Taylor, partner, Stowe Family Law says: “The abolition of the Lifetime Allowance (LTA) may have a drastic impact on financial negotiations following divorce for anyone who previously would have been hit by the LTA due to holding a pension fund valued at over £1.07m.
“In situations where a couple has agreed to have a pension sharing order made in respect of such a fund following a divorce, the percentage of the fund to be shared may now need to be recalculated to reflect the increased net value of the fund.
“This may also be problematic, where a large pension fund is not to be shared, but instead the non-pension holder is to retain a greater proportion of other assets to ‘offset’ the pension wealth retained by the holder.
“The value of the retained pension has now dramatically increased, given the reduction in tax to be paid on receipt of funds – whether as income or lump sum – or following a crystallising event, such as transferring the fund overseas or reaching age 75 with unused pension benefits.
“Failure to recalculate the value of the fund without accounting for the LTA could see non-pension holders lose out.
“An unintended impact of the abolition of the LTA may be to make high net worth pension negotiations more complex. Whereas previously, pension sharing could be an attractive settlement route, as it could minimise or eliminate tax paid due to the LTA, that advantage no longer applies, which may lead to more arguments about whether pensions should be shared or not.
“Given the scope of these changes, it is vital that parties – particularly the non-pension holding spouse – take legal and financial advice before finalising any settlement.”
