The chancellor looks set to significantly increase both the lifetime and annual pension allowances in tomorrow’s budget, in a bid to boost employment across older age groups.
It is being widely reported that the lifetime allowance will be increase to £1.8m, from its current level of just over £1m – a 70 per cent increase that will largely benefit middle and higher-earners. At the same time Jeremy Hunt is expect to increase the annual allowance from £40,000 to £60,000. There has also been indications that the Money Purchase Annual allowance (MPAA) will be increased from £4,000 to £10,000 a year. This is the amount that can be saved into a pension, with tax relief, once an individual has started accessing pension benefits after the age of 55.
The government has signalled that it hopes these changes might stop higher-earning individuals retiring early. This has been a particularly problem for NHS doctors. IT is also hoped this will encourage those who did retire during Covid back into work, as they would be able to make more substantial contributions to top up pension plans.
Those in the industry said such changes would be good news for many savers. Aegon pensions director Steven Cameron described the combination of measures as a “triple unlock” of private pensions.
“It’s now widely accepted that these ‘allowances’, which act as restrictions, can discourage individuals later in their working lives from staying in or returning to the workforce. Any increases to these will be good news and in line with the Chancellor’s aim to get this group off the golf course and back to work.”
He adds: “We’re hoping for bold increases as each of the allowances was far higher at some point in the past and if they had been inflation protected rather than cut back by previous Chancellors, much more could have been built up in pensions to provide more comfortable retirements.”
Standard Life managing director for customer Dean Butler adds: “The lifetime allowance has become unfit for purpose in recent years and has increasingly caught middle earners who have saved diligently over the years.
“Extending the allowance to £1.8m would take us back to 2011/12 levels and represents a welcome reversal after years of cuts. The change would represent a major shift in pension policy given the allowance was due to be frozen at its current level of £1.07m until 2026, but a combination of inflation and a desire to keep older people in the workforce looks like it’s prompted a rethink.”
He pointed out that while this current limited of £1m-plus may sound generous, when converted to an inflation-linked annuity it would generate an annual income of just £44,000 a year.
He adds: “Increasing the annual allowance by £20,000 to £60,000 is likely to be welcomed particularly by those looking to catch up on the retirement provision or for those with irregular earnings who are relying on making larger contributions later in their careers.”
TPT Retirement Solutions DC director, Philip Smith says any decision to raise the lifetime and annual allowance would be welcome news.
He says: “For DC savers, who face the challenge of providing long term sustainable income from their retirement pots, the ability to work longer and save more will give many the opportunity to build greater retirement security whilst remaining economically active and contributing to the UK’s economic success.”
He adds that at the current level the lifetime allowance was beginning to affect increasing numbers of highly skilled employees who we need to keep in the labour market.
However Quilter head of retirement policy Jon Greer said this policy u-turn could in fact encourage more high earners to retire early, as the will be able to save substantially more into a pension during their working lives.
“Both potential changes [to the lifetime and annual allowances] are likely going to be packaged in a way that makes it seem like this is to get over 50s back to work, when arguably it may have the opposite for some who will be able to fund their retirement earlier. Perhaps the reality is the government are trying to fix a problem of senior public sector employees leaving the workforce, which inadvertently is a problem of their own making.
“For senior doctors and others nearing the lifetime allowance, the current limits provide a serious disincentive to keep working as any contributions will be heavily taxed. This and annual allowance issues have been plaguing the health service and causing serious retention issues in recent years. The government are under pressure to keep the NHS afloat, and this change may be mainly directed at this group as they are unable to flex their pension accrual in the way a defined contribution pension savers can.”
