Spring Budget 2023: Pension lifetime allowance abolished
The Chancellor confirmed the pension lifetime allowance will be abolished, going one step further from increasing this limit, as reports suggested earlier this week.
Speaking in a packed House of Commons, Jeremy Hunt said “no one should be pushed out of the workforce for tax reasons”.
He said: “Some have asked me to increase the lifetime allowance from its £1 million limit.
“But I have decided not to do that.
“Instead, I will go further and abolish the lifetime allowance altogether.
“It’s a pension tax reform that will stop over 80% of NHS doctors from receiving a tax charge… incentivise our most experienced and productive workers to stay in work for longer.
“And it will simplify our tax system, taking thousands of people out of the complexity of pension tax.”
Pension lifetime allowance explained
The lifetime allowance is the maximum amount you can save into a pension without having to pay an additional tax charge.
It currently stands at £1,073,100 but was hacked from £1.8m in 2012, before being frozen by the then Chancellor Rishi Sunak with this lower figure due to remain until 2026.
Reports earlier this week suggested the LTA would increase to between £1.5m and £1.8m, but Hunt has gone further.
Supporting Budget documents reveal the LTA charge will be removed from 6 April 2023 before being abolished altogether in a future Finance Bill.
It stated the measure will “remove barriers to remaining in work and simplify the tax system by taking thousands out of the complexity of pension tax”.
‘Seismic change’ and ‘biggest U-turn on pension tax policy in a decade’
However, 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.”
Jon Greer, head of retirement policy at Quilter, said: “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.”
He added: “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.”
Megan Jenkins, partner at wealth manager, Saltus, said that while a positive move, it’s important for people to remember that policies have changed before, and can change again.
Jenkins said: “Today’s announcement doesn’t give anyone saving for their retirement peace of mind that they can make plans without having the rug pulled out from underneath them, so it is vital that savers remain mindful and continue to consider alternative tax wrappers for maximum diversification.”
‘Back to work Budget’
The LTA measure is one part of a larger Government drive to get more people back into work, as figures reveal there are 6.7 million people of working age who are neither in nor looking for work.
And there has been a surge in inactive 50-64-year-olds adding to this number, with an extra 320,000 in this category since before the pandemic.
As such, the Chancellor confirmed the pension annual allowance will increase from £40,000 to £60,000 from 6 April 2023 – the first rise since April 2010, though much lower than the £255,000 over a decade ago. The annual allowance increase was also widely expected.
Individuals will continue to be able to carry forward unused annual allowances from the three previous tax years.
Elsewhere, the Government will increase the Money Purchase Annual Allowance from £4,000 to £10,000 allowing people who have already flexibly accessed their pension to put more in to build up their retirement savings before leaving the workforce.
In addition, tapered annual allowance will also rise from £240,000 to £260,000 from 6 April 2023.