15 March 2023
If you are covering the changes to pension tax relief in the budget, please see the following comment from Jon Greer, head of retirement policy at Quilter:
Lifetime Allowance (LTA) and Annual Allowance (AA)
"Abolishing the lifetime allowance was a real rabbit out of the hat moment for Hunt today after rumours swirled over the last few days about it being significantly increased. Scrapping the LTA altogether helps ensure that senior people at the top of their game are not disincentivised to work, whether it incentivises people back to work is another matter.
"This represents the biggest U-turn on pension tax policy in a decade and for defined contribution savers this will come as a much-welcomed change. The lifetime allowance was applied to the value of the fund accumulated, including investment returns as well as pension contributions, and people can inadvertently exceed the threshold even if they stop actively contributing while still some way below it.
"Many who had ceased contributing to pensions for fear of incurring lifetime allowance tax charges may well be considering restarting contributions and together with a 50% increase in the annual allowance can make material tax savings. This is a seismic shift in policy to the benefit of higher earners. One wonders how long such generosity will last for as we’d expect a significant uptick in the amount being funded into pensions by those with higher earnings. This is not a cheap policy decision with the government forecasting that it will cost them around £2.7bn to scrap the lifetime allowance over the next five years. This therefore represents a golden opportunity for high earners to plough money into their pensions.
"However, hidden in the documents is a sting that people will now only be able to take 25% tax free cash from their pension subject to a maximum of £268,275 so even if someone has a pension pot far bigger than the previous LTA this will be the most they can take out. However, those who have existing rights to higher TFC amounts will retain them.
"The changes to the AA while once again aimed at high earners have a much more practical application and help to fix a significant problem with the NHS Penson Scheme and other public sector defined benefit schemes. Many doctors have been forced to pay huge tax bills as a result of how the scheme interacts with the AA which definitely does disincentivise them to take on extra hours with some opting to retire earlier.
"Many people leave the workplace because they feel they have accrued enough money already and while they could increase their retirement wealth, they have decided to start their retirement a little earlier and take that financial hit. Whether an unlimited lifetime allowance changes this behaviour is yet to be seen.
Tapered annual allowance
"The tapered annual allowance has had few supporters, but is retained subject to increasing the minimum amount tapered annual allowance to £10k (from £4k). The tapered annual allowance raises revenue from those with income including pension contributions that is above £260k (increasing from £240k currently). The problem with the taper still remains though; it is a complex way of restricting relief for the very highly paid and is inflexible for those in defined benefit schemes who typically have less control over the amount deemed to have been added to their pension each year. Therefore, it still provides a disincentive for them to work more and signals to them that normal pension provision is not designed for them."
