The pensions industry has welcomed Jeremy Hunt’s shock decision to scrap the lifetime allowance on pensions, enabling people to save unlimited sums in these tax-efficient savings plans.
However, the Budget small print limits the generosity of this move, as there will be curbs on the maximum that can be taken out as a tax-free lump sum. This will remain at 25 per cent of the current lifetime allowance (just over £1m) meaning a maximum tax-free payment of £268,275.
Aegon pensions director Steven Cameron says: “The chancellor pulled a massive rabbit from his Budget hat by scrapping the Lifetime Allowance, rather than a rumoured increase to £1.8m. This comes at the same time as the Annual Allowance is being increased by 50 per cent from £40,000 to £60,000, and the Money Purchase Annual Allowance (MPAA) being raised from £4,000 to £10,000.
He adds: “It has always been excessive to have both a lifetime and annual allowance, effectively limiting not just how much can be paid in each year but how much you can hold on a tax favoured basis in total. With most people now in a defined contribution rather than a defined benefit scheme, it makes sense to focus on setting a limit on contributions rather than ultimate benefits.”
He points out that scrapping the lifetime allowance stops savers facing a tax penalty if they achieve a good investment return.
Pension experts said the removal of the LTA will cut out a swathe of complex pension tax rules. It may – subject to any detailed provisions – also allow people who have already started taking benefit to top up pension provision.
Canada Life technical director Andrew Tully describes this as a “seismic change” to the pension tax landscape. He says: “This reverses a decade of declining lifetime allowance which discouraged higher earners from saving.”
Aon’s head of retirement policy Matthew Arends says these announcement signal to the British public the importance of saving for retirement. He said the abolition of the LTA, along with the likely extension of automatic enrolment were really welcome news.
“With no LTA, people can save without the need for elaborate tax planning. To put this into context, even after recent improvements in annuity prices, for people with DC savings, a pension pot of the current LTA of £1.07m equates to an annual pension (after tax) of around £37,800 – broadly equivalent to ‘comfortable’ under the PLSA’s Retirement Living Standards, and less than ‘comfortable’ for anyone living in London.
“Without the concern of working around this artificial, tax-driven ceiling people can simply save as much as they can to support their old age as comfortably as they can.”
He says this news will be particularly welcomed by the next generation of private sector pension savers – Generation X – the majority of whom have had limited access to final salary pensions and who are now within 10-15 years of their potential retirement date.
Standard Life managing director for customer Dean Butler adds that this “surprise abolition” removes the cap on savings limits. “Billed as a reform to encourage older people to remain in work, the Treasury’s change of heart will have been influenced heavily by a need to retain senior NHS employees, many of whom having been taking early retirement to avoid substantial pension tax bills.
“While the generosity of the move will have taken everyone by surprise, there were good reasons to review a limit that was increasingly catching middle and higher earners, particularly those with defined benefit pensions, who have done the right thing and saved regularly over the years are who were bumping up against the limit.”
However some in the industry pointed out that these changes did not address the real problem in the pension sector: the vast majority of employees failing to save enough for retirement.
The People’s Pension director of policy Phil Brown says: “At a time when the NHS is facing significant challenges, any measure that encourages valued and experienced doctors to continue working is to be welcomed, but today’s announcement on the Lifetime Allowance and Annual Allowance will do nothing to solve the problem of under-saving in the UK. These changes to the pension allowances won’t impact the vast majority of hard working savers and means very little to the millions of people who save through automatic enrolment. Reform to workplace saving will be the only way to ensure that millions more people can save enough to live on in retiremen.”
While much of the initial focus has been on the shock decision to get rid of the lifetime allowance, some experts said that it changes to the MPAA that will have a more wide-reaching effect when it comes to helping the over 50s save for retirement.
Quilter head of retirement policy Jon Greer says this will provide real incentive in getting some over-50s back to work.
“The MPAA is a relatively little-known tax rule, yet many currently fall foul of their annual pension allowance perversely reducing from £40,000 to £4,000 if they have accessed their pension and then returned to work and restarted contributions again.
“Raising this to £10,000 alleviates the risk of hitting the MPAA for most people with earnings of less than £100,000 whose contribution are up to 10 per cent of earnings. This is a positive step as for lots of people a primary reason for returning to work or taking on more hours is to boost their pension pots.
“According to the government’s spending forecasts, increasing the MPAA to £10,000 from April 2023 will cost £170 million by the 2027/28 tax year. This will likely be money well spent given how intent the Chancellor is on driving the over 50s back to the workplace, and this change will also go hand in hand with the government’s ‘returnerships’ programme announced today.
But Greer adds: “While we support this move, there are still ways to improve how this rule works without opening the flood gates to tax avoidance. Ultimately, the government should have moved to scrap the rigid MPAA rules, and instead explored whether a general anti-abuse approach could work better than the rigid, strict approach currently employed.”
