14 March 2023
If you are covering the rumours around the Lifetime Allowance and the Annual Allowance, please see the following comment from Jon Greer, head of retirement policy at Quilter:
"Rumours are rife that the lifetime allowance is going to return to its previous height in 2010/11 of £1.8m, a near 70% jump from its current level £1,073,100. Elsewhere there are claims that the annual allowance is going to grow from £40,000 to £60,000, which does not get anywhere near its highs of £255,000 in 2010/11.
"In the 2021 Budget, the lifetime allowance was due to be frozen at its current level till April 2026. On the basis of costings at the time this would have raised an additional £1bn of tax over the period although it was thought this was a significant underestimate. In this complete U-turn of approach, the cost of increasing the lifetime allowance so materially will come under close scrutiny as its expected that the change to the LTA and AA could cost billions a year. Initial cost estimates, as well as the Treasury’s own budget policy costings, are inherently open to a high degree of uncertainty in this area though.
"These changes for high earners are not inconsequential and if the lifetime allowance does jump to £1.8m then this could result in a benefit to an individual (who has a fund of £1.8m) of around £181,725 due to saved tax.
"Both potential changes 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.
"The lifetime allowance is a simple and effective way of limiting tax-privileged pension saving over a lifetime but has some significant drawbacks. As it applies to the value of pension savings accumulated, including investment returns as well as pension contributions, people can inadvertently exceed the lifetime allowance even if they stop actively contributing while still some way below it. This is a little opaque and difficult for people to manage – and to some extent unfair. It can also lead to odd behaviours for example, leading them to invest their pension savings in lower-risk, lower-return assets or even to start withdrawing money from their pension earlier, in order to avoid accidentally exceeding the limit. Increasing the lifetime allowance to £1.8m will move the goal posts for many savers, removing great swathes of complex transitional rules that were introduced when the limit was lowered periodically over the last decade.
"The following table shows the value of current funds that could hit the current LTA in 3 years’ time based on different growth rates:
|
Annual Growth Rate (after charges) |
1% |
2% |
3% |
4% |
5% |
6% |
7% |
8% |
9% |
|
FV in 2023-24 to hit LTA in 3 years time |
1,062,371 |
1,031,430 |
1,001,679 |
973,062 |
945,524 |
919,015 |
893,489 |
868,899 |
845,203 |
"The following table shows the value of current funds that could hit the current LTA in 3 years’ time with an increased LTA of £1.8m based on different growth rates:
|
Annual Growth Rate (after charges) |
1% |
2% |
3% |
4% |
5% |
6% |
7% |
8% |
9% |
|
FV in 2023-24 to hit LTA in 3 years time |
1,747,062 |
1,696,180 |
1,647,255 |
1,600,193 |
1,554,908 |
1,511,315 |
1,469,336 |
1,428,898 |
1,389,930 |
"Other pension rumours are that Hunt will tweak the MPAA rules. Although many won’t have appreciated the implication of the MPAA before they access their pension flexibly, they likely will have after they find out that their annual allowance has been reduced from £40,000 to £4,000. For many people, one of the primary reasons they want to return to work is to boost how much they have in retirement, and this perverse rule disincentives this. Restoring the MPAA to the pre-2017 level of £10,000 per annum might mean that people are happier to dip into their pension so that they can reduce their workload but crucially still stay working so if this rumour turns out to be true this will be a major positive.
"This £10,000 figure would alleviate the risk of hitting the MPAA for most people with earnings of less than £100,000. However, it might be worth overhauling the rules completely and implementing an approach similar in part to pension commencement lump sum recycling pre-planning condition which appears to work effectively in practice."
