Steven Cameron, Pensions Director at Aegon, has commented on the various pensions announcements made by Jeremy Hunt this afternoon
He said: “The Chancellor pulled a massive rabbit from his Budget hat by scrapping the Lifetime Allowance, rather than a rumoured increase to £1.8m. This comes at the same time as the Annual Allowance is being increased by 50% from £40,000 to £60,000, and the Money Purchase Annual Allowance being raised from £4,000 to £10,000.
“It has always been excessive to have both a lifetime and annual allowance, effectively limiting not just how much can be paid in each year but how much you can hold on a tax favoured basis in total. With most people now in a defined contribution rather than a defined benefit scheme, it makes sense to focus on setting a limit on contributions rather than ultimate benefits. In a defined benefit scheme, having a lifetime allowance meant those who saved diligently could end up facing a tax penalty if they achieved good investment returns.
“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 £1,073,100 or £268,275. Allowing 25% of an unlimited pension pot tax free would have been excessively generous.”
He continued: “The Chancellor’s bumper pack of pension tax relaxations will come as a welcome boost to many individuals previously hampered by limits on how much could be paid in or built up on a tax favoured basis within their pension. Scrapping the Lifetime Allowance coupled with increasing the Annual Allowance by 50% to £60,000 will be particularly beneficial to higher earners.
“But while not mentioned in his Speech, the change which will benefit the greatest number of individuals is the increase in the little known Money Purchase Annual Allowance which will support a greater number of over 55s staying in or returning to the workplace.
“The Money Purchase Annual Allowance is increasing from £4,000 to £10,000. Many individuals over 55 who have taken income ‘flexibly’ from their money purchase pension may not have realised that by doing so, they reduce the maximum they can then save in a pension. They may have done so because they lost their job or needed extra funds to tide them over during the pandemic or the current cost of living crisis. At its previous level of £4,000, there was a real risk it stopped individuals re-entering the workforce from benefitting fully from the workplace pension that came with the job.
“The Chancellor expects the pension changes to be good for the economy. Having more over 50s in work will address the worrying increase in ‘economic inactivity’ amongst this group, and instead will support future economic growth. While scrapping the Lifetime Allowance and increasing other allowances will mean some individuals receive more in tax relief and hence pay less in income tax, and fewer will pay a tax penalty on breaking the limits, these ‘losses’ to the Exchequer should be more than compensated for by having a larger working population paying income tax.”
He added: “The Annual Allowance increases by half from its current level of £40,000 to £60,000 this April. It has been subject to the most extreme cuts in previous years. Prior to April 2011 it was £255,000, but was cut back to £50,000 on 6 April 2011 and then to £40,000 in April 2014.
“The Annual Allowance caps the amount that can be paid into or built up in a pension each year without suffering a tax penalty. In a defined contribution scheme, this is the maximum contributions (from the individual, employers and third parties) so it’s simple to assess against. In a defined benefit scheme it’s based on a formula which compares the value of your accrued pension at the end of the year with the value at the start increased with inflation.
“As well as the increase, the facility to carry forward unused relief from three previous years remains. This means in the 2023/24 tax year, as well as the £60,000 allowance for that year, some people may have some unused annual allowance from the past three years of up to £40,000 as well. So for someone who hasn’t made contributions in previous tax years, but who was a member of a pension scheme, this could allow up to £180,000 to be paid in next tax year.”
When it comes to the lack of mention of state pension age review in the Budget, he goes on to say:
“With no mention in his Budget statement around state pension age, millions remain in limbo regarding future Government plans over what their state pension age might be. In his November Budget, the Chancellor announced the outcome of a review of the state pension age would be shared early in 2023. There is speculation that on affordability grounds this could be increased to 68 earlier than currently planned, especially after retaining the triple lock this April comes at a high cost. Rather than the increase happening around 2038, it might be brought forward to say 2035, affecting those currently aged 52 to 55. People really do need to have certainty over their state pension age at least 10 years in advance to allow them to plan ahead. For many, the state pension and when it comes into payment are significant to their retirement plans.
“The Chancellor also shared updated predictions that the rate of inflation might fall to 2.9% by the end of 2023. The triple lock pays an increase of the highest of price inflation, earnings growth or 2.5%. The inflation figure used is the year till September. While earnings growth may remain high throughout 2023, a lower inflation figure reduces the likelihood of the formula producing a double digit increase, and may make it easier for the Government to retain the triple lock for another year.”