Reports have emerged that the Chancellor could increase in the Budget the amount people can save into their pensions tax-free in order to encourage over-50s to get back to work.
Currently if the value of a pension pot exceeds the lifetime allowance of £1.073million then the saver can face excess tax penalties of up to 55% on access.
Gary Smith, Director of Financial Planning at wealth manager Evelyn Partners, says that such a move would be very welcome, but that encouraging early retirees back into the workforce faces other tax disincentives: ‘The problem for early retirees who have accessed their pension flexibly is that they then face the money purchase annual allowance if they return to work. This caps further contributions into a pension while benefitting from tax relief to £4,000, and is a major block to rebuilding a pension pot.
‘Some high-earners would also be scuppered by the complex rules around tapered annual allowance, which can also limit annual pension savings with tax relief.
‘Nevertheless, it’s to be hoped that the report turns out to be well-founded, as boosting the LTA reduces a quite sudden and punitive tax charge that many savers stumble into unwittingly.
‘The LTA is not just an issue for defined benefit pension scheme holders – such as NHS GPs, whose reluctance to keep on working because of pension tax charges is well-documented – but also increasingly defined contribution savers, as inflation boosts earnings. We are used to tax allowances and thresholds being frozen but let’s not forgot that the LTA has been slashed from £1.8million in 2010. Moreover auto-enrolment has boosted significantly the numbers saving into defined contribution schemes since 2012, and that means in the coming years and decades more and more DC pots will hit this limit.
‘As nominal wages rise in the face of high inflation, this will lead to higher pension contributions in cash terms, so freezing the LTA until 2028 as is currently planned, is effectively a very steep real-term cut in the real value of the threshold. This threatens to expose increasing numbers of workers to potential tax charges on their pension pots.
‘One final hope is that if Mr Hunt is considering raising the LTA, then that would seem to reduce the likelihood of him targeting pensions tax relief with the other hand – something many have feared is a strong possibility as the Treasury seeks out sources of new revenue, and earners protect against rising income tax by saving into pensions.’
