Chancellor of the Exchequer Jeremy Hunt has abolished the lifetime allowance on pension savings during the Spring Budget.
This comes several years after current prime minister Rishi Sunak froze the threshold at £1.07m ($1.3m, €1.23m) until the 2025-26 financial year.
Hunt was expected to raise the threshold to £1.8m from £1.07m – but he has scrapped the allowance instead. The lifetime allowance is the total figure Brits can build up in all pension savings without incurring a tax charge.
The lifetime allowance charge will be removed from April 2023 before the allowance is abolished entirely from April 2024.
Hunt said: “No one should be pushed out of the workforce for tax reasons.”
The maximum tax-free cash someone can take will be frozen at the current level of £268,275 as part of the reforms.
‘Seismic change’
Dean Butler, managing director for customer at Standard Life, part of Phoenix Group, said: “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 who were bumping up against the limit.”
Andrew Tully, technical director at Canada Life, said: “This is a seismic change to the pension tax landscape, reversing a decade of declining lifetime allowance which discouraged higher earners from saving. However tax-free cash will be limited for most people to the current maximum level of £268,275.
“This caveat means the abolition isn’t quite as positive as it first appears. While the harsh 55% LTA tax is being removed, benefits above the tax-free cash level will be subject to income tax. Allowing those with suitable protections to receive higher amounts of tax-free cash doesn’t simplify pensions as much as we would have hoped, potentially retaining layers of complexity.”
Steven Cameron, pensions director at Aegon, said: “Removing the lifetime allowance will also cut out a swathe of complex pensions tax rules. It will allow individuals who have stopped contributing for fear of exceeding it to consider restarting contributions. It may also, subject to any detailed provisions, allow people who have already started taking benefits to top these up.
“Not surprisingly however, the amount which can be taken tax free will be restricted to 25% of the current Lifetime Allowance of £1.07m or £268,275. Allowing 25% of an unlimited pension pot tax free would have been excessively generous.”
Annual allowance and MPAA
During the 2023 Spring Budget, Hunt also said that the tax-free annual allowance for pension savings will rise to £60,000 from £40,000.
This change will take place in April 2023. The facility to carry forward unused relief from three previous years remains.
Butler said: “Only a small number of earners will ever reach the current annual allowance of £40,000, but the benefits of today’s increase will be a particular help to those who are looking to catch up with their savings later in their careers. Those with their own business for example may have put off saving when starting out but will have extra scope to make up for lost time.”
Following industry backlash, Hunt has also increased the Money Purchase Annual Allowance to £10,000 from April 2023.
Currently, the MPAA restricts future pension savings where someone has flexibly accessed their pension, removing the benefit of tax relief on annual contributions of more than £4,000 ($4,817, €4,508).
Now Hunt is restoring the MPAA to £10,000, which was the original allowance in 2015 before it was cut in 2017 to just £4,000.
Tully added: “This simplifies the pension tax system and will help many lower earners boost their pension saving without fear of triggering a tax charge. A small change to the rules which makes a big difference and could even save the Treasury some money through increased employment, economic productivity and tax receipts.
“We are pleased that the chancellor has listened to the calls we made to increase the MPAA.”
Billions
According to the Office for Budget Responsibility, the package of tax reforms including abolishing the lifetime allowance, raising the annual allowance and increasing the MPAA will cost over £4bn over the next five years.
David Brooks, head of policy at independent consultancy Broadstone, said: “Abolishing the lifetime allowance and increasing the Annual Allowance is a huge tax giveaway to wealthiest people in the country.
“Combined with the increase to the MPAA it totals a package that will cost the country over £4bn through the next five years. £2.75bn for the LTA abolition, £1.1bn for the annual allowance and £170m from the increase to the MPAA.
“The annual allowance increase again provides a tax bonus for higher earners but is likely to work against the chancellor’s aims to create a ‘back to work’ budget. That is because those able to pile an extra £20,000 of cash every year into their pension will build their retirement treasure trove far faster and may well be in a position to retire earlier as a result.”
Tom Selby, head of retirement policy at AJ Bell, added: “Jeremy Hunt has unveiled a pensions tax-cutting bonanza far beyond anyone’s pre-Budget expectations and the most significant retirement policy intervention since the 2015 ‘pension freedoms’.
“The lifetime allowance has long acted as a drag anchor on strong investment performance and a deterrent to retirement saving, while also creating horrendous complexity in the system. It has also added to the huge turmoil engulfing the NHS, with senior doctors choosing early retirement over paying a pension tax penalty.
“Significant hikes in the annual allowance, and in particular the money purchase annual allowance, are also welcome and should help reduce disincentives for over 55s to return to the workforce.
“Taken together, these pension tax cutting measures amount to a colossal boost to savers and retirees and send a clear message to hard-working savers that the government is now firmly on your side.”
Simplification for trusts and estates
Also, within the Budget document, as seen by International Adviser, HM Revenue & Customs (HMRC) also intends to make changes to inheritance tax (IHT) regulations to remove non-taxpaying trusts from reporting requirements.
The government will formalise and extend an existing income tax concession for low-income trusts and estates and provide further changes to make calculations and reporting more straightforward.
Not many details were given about the change.
For more on the Budget by our sister publication ESG Clarity – click on the link.
