Following the Chancellor’s abolition of the lifetime allowance as well as other significant changes to pensions legislation in his spring budget announcement this afternoon, IFA’s and wealth managers have reacted to the news:
Verona Kenny, Managing Director, Intermediary at 7IM said: “In what’s been one of the biggest shakeups in pension allowances since A Day, the Chancellor has given retirees a game-changing boost to how much they can save into their pension both annually and throughout their lifetime.
“In particular, the scrapping of the Lifetime Allowance (LTA) means that diligent retirees can now save into their pension pot without having to worry about punitive tax charges. This is great news for those who have worked hard and saved diligently throughout their working lives. Furthermore, the changes also provide an incentive for those who have stopped saving into a pension due to previously hitting the LTA to start saving again.
“It was also great to see (albeit tucked away in the Spring Budget document) that the Money Purchase Annual Allowance has been restored to £10,000 – something we have lobbied the Treasury for along with a number of other firms. The £4,000 limit, which was set five years ago, has been a thorn in the side of retirees who have needed to restore their retirement savings, having – out of financial necessity – taken advantage of pension freedoms to access their pension early, so the reversal of this is most welcome.
“All of this should help retirees feel more confident about their pension pots lasting the distance and allow them to enjoy a more comfortable retirement. Indeed, our recent research of over 500 retirees, revealed that nearly 1 in 3 (31%) retirees are concerned about running out of money at retirement. Today’s announcement should go a long way in alleviating this concern.
“The significantly more generous allowances announced today present another great opportunity for advisers to engage with clients to help them solve the retirement puzzle. But, as I’ve said repeatedly, it falls to all of us as an industry – not just advisers – to get it together to provide the solutions and services that enable advisers to make the most of the existing and new opportunities so that we can deliver the best possible retirement outcomes for clients.”
Gill Millen, Managing Director of Bowmore Financial Planning, says: “This increase in the Annual Allowance is long overdue.”
“Over the last decade investors who have accidentally breached their lifetime allowance have had to pay £1.9billion in tax charges. That includes £649million in tax charges levied at a punitive 55% tax rate.”
Millen adds that the Annual Allowance restrictions have hit senior executives as well as NHS doctors and consultants especially hard. According to Bowmore, today’s changes to the pension allowance schemes will cost the government £4bn over the next five years.
Commenting on the lifetime Allowance (LTA) and Annual Allowance (AA) Jon Greer, head of retirement policy at Quilter said:
“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. “
On the Tapered annual allowance Greer said:
“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.”
Les Cameron, head of technical at M&G Wealth, said: “The Pension Commencement Lump Sum (PCLS) has been capped at 25% of current Lifetime Allowance (LTA) for those without protections. So, abolishing the LTA removes the penalty of taxing growth and benefits accrued. However, one of the key incentives to fund your pension has been removed. £100 of pension fund below the current LTA gives basic and higher rate tax payers £85 and £70 respectively. Now £100 over what was the current LTA will only deliver £80 and £60, matching what that £100 will have cost the basic and higher rate tax payer. This reduction in one incentive still leaves pensions as a highly useful and tax-efficient savings vehicle.
“The increase to the Annual Allowance also has a knock-on impact on the Tapered Annual Allowance for high earners.
“You lose £1 of Annual Allowance for each £2 of “adjusted income” you had in excess of £240,000. Currently, your Annual Allowance is reduced to £4,000 when your ”adjusted income” hits £312,000. Going forward the limit is increasing to £260,000 and with the extra £20,000 Annual Allowance. This means you are “fully tapered” to £4,000 at £372,000 opening up some scope for additional pension funding by higher earners and/or a reduction in Annual Allowance charges.”
Stewart Sanderson, Head of Private Clients at Brooks Macdonald said:
“Today, Chancellor Jeremy Hunt announced huge reform and assistance with the aim to encourage people back to work. Targeting packages to help new parents, the long-term sick, and the over 50s to get back to work and grow the economy.
“Although it was claimed that the Chancellor wanted this budget to be ‘boring’ there was hugely significant news for pension savers, who have received a triple boost in the amount they can save for their retirement. In a surprise move, Hunt completely abolished the lifetime allowance (LTA) and announced the expected increase to the tax-free annual allowance (AA) for pensions from £40,000 to £60,000 and the rise in money purchase annual allowance (MPAA) from £4,000 to £10,000.
“Abolishing the LTA allowance means pensions, irrespective of how much they grow by will remain tax free. This will reward those who have saved hard into pensions to secure their futures. It is hoped that it will discourage higher earners, particularly in the public sector, from retiring early as they will no longer face potential tax penalties when they exceed the allowance. It may also help those with irregular earnings who were planning to make larger pension contributions later in life.
“These changes, particularly the abolition of the LTA allowance will breathe new life into millions of peoples’ pension planning, and financial advisers will be on hand to help people take advantage of the unprecedented opportunity it creates. Hunt wants us all to invest in ourselves and bridge the additional long-term risks as we all live longer, with responsibility shifted from schemes to us as individuals.
“Although a pro-business message was delivered, the Chancellor resisted calls for lower taxes and did not renege on his 2022 increases, including the much-discussed rise in corporation tax and changes to income taxes. This means businesses and hundreds of thousands of higher earners will be looking at increased tax bills from 6 April. However, Hunt threw a lifeline to businesses saying that he would allow deductions of investment to give full capital expenses for the next three years. This could make the UK a more attractive place to invest.
“This budget is designed to get people back to work and bolster economic growth. Not only will this create employment opportunities and increased tax revenue, but it will be transformative to pension savers.”
Nigel Peaple, Director of Policy and Advocacy at the Pensions and Lifetime Savings Association, PLSA, said: “The pensions tax relief system provides crucial support for people by boosting their savings over the long term. The PLSA has long argued that tax relief is needed to encourage behaviours which help more people achieve an adequate income in retirement.
“Increasing the Lifetime Allowance, Annual Allowance and Money Purchase Annual Allowance will encourage older, often highly skilled or experienced workers, including senior doctors, to stay in the workforce and provide more flexibility for retirees to re-enter the world of work. These changes will also allow additional scope for savers to contribute lump sums, perhaps from an inheritance or a redundancy payment, into their pension to meet any shortfalls before they retire.
“While these changes to tax relief will be of most value to average and higher earners, it is positive that the Government today did not bring forward the date at which the State Pension Age would rise to 68 as has been speculated on in the media. Many people, especially those on lower earnings, rely heavily on the State Pension for their retirement income. Increases in the State Pension fall disproportionately on people on lower incomes who generally have poorer longevity. We welcomed the Government’s recent decision to introduce a 10% rise in the value of the State Pension from next month, in line with the Triple Lock.
“The Government’s recent support for new legislation that enables increases in the amount of automatic enrolment pension saving will also help people on lower and average earnings. We believe the Government should go further in this regard by gradually increasing pension contributions in the late 2020s and early 2030s so that they rise from 8% to 12%, with a larger share of the increases falling on employers, so that in future pension contributions are split evenly between the employer and employee.
“The Government has made clear that it wishes to find ways to encourage private sector pension funds to invest in the UK. We have worked with the Government on this issue in the Productive Finance Working Group and look forward to contributing to their further work in this area, both on the LIFTS initiative, and on any broader proposals planned for the Autumn Statement. We note that the Government also plans to consult on whether to further consolidate the investment pools that operate in support of the Local Government Pension Scheme. As it is only five years since the first pooling reform which set up eight investment pools to serve the around 90 local authority pension funds in England and Wales, we think a further large-scale reform would be unlikely to achieve very much at this time.”
Iain McLellan, Director at pensions advisory firm Isio, comments on today’s budget:
“With the Chancellor staying silent on the thornier issues around pensions tax in last year’s Autumn Statement pressure has been mounting to encourage over 55s to stay in work or return to the workplace. With today’s changes, he did not disappoint in making changes this time, but has he done enough?
“Applying tax relief limits to both pension contributions and withdrawals has proved overly complex and unfair. By abolishing the Lifetime Allowance and increasing the Annual Allowance, this Budget has given some pensions savers an undeniable boost and will incentivise the use of pensions as a savings vehicle. It will also have the effect of retaining within employment, some of the most important talent we have in the UK.
Abolishing the Lifetime Allowance is a significant simplification that will be welcomed by both savers and the pensions industry. However, the retention of the various Annual Allowance tapers, albeit at a higher level, will reduce the level of tax paid by savers but still retains the underlying complexity. Balancing the opportunities and risks will result in a greater need for advice and support from employers as savers grapple with how to get the best outcomes and maximise savings in the new system.
Employers will also need to consider how the changes could impact both employee behaviour and their benefit offerings, for example around dealing with re-enrolment requests and reviewing life insurance arrangements.
The Chancellor highlighted the importance of older generations and the need for their skills at work. With regard his goal of encouraging people to stay in or go back to work, it is good news for higher earners and those who were not thinking of retiring anytime soon. Yet whilst recent retirees may be left feeling like they have missed out, they may not want to give up the flexibility and lifestyle they have in retirement to go back to work.
“There was some speculation that the Chancellor would look outside of taxes and increase the State Pension Age ahead of 2044. If the tax changes don’t have the desired effect, this could remain on the agenda for Budgets to come. What is certain is that for many there is a golden opportunity right now.”
David Brooks, Head of Policy at leading independent consultancy Broadstone, commented: “Abolishing the Lifetime Allowance and increasing the Annual Allowance is a huge tax giveaway to wealthiest people in the country.
“Combined with the increase to the MPAA it totals a package that will cost the country over £4 billion through the next five years. £2.75 billion for the LTA abolition, £1.1 billion for the Annual Allowance and £170m from the increase to the MPAA.
“The Annual Allowance increase again provides a tax bonus for higher earners but is likely to work against the Chancellor’s aims to create a ‘back to work’ budget. That is because those able to pile an extra £20k of cash every year into their pension will build their retirement treasure trove far faster and may well be in a position to retire earlier as a result.
“It is hard to escape the view that this package of measures is a political move than seriously, considered pension policy. It is overwhelmingly weighted in favour of the richest who will benefit from significant increases to saving potential. Given the UK already faces a pensions adequacy crisis, it is difficult to see how these giveaways are well-targeted to ensure the nation is in the best possible position to achieve positive retirement outcomes.”
Megan Jenkins, partner at Saltus, says: “It was reported that Hunt would increase the Lifetime Allowance (LTA) in his Spring statement, but he has actually gone further than expected by scrapping it altogether. And while this may sound like a positive move, it is potentially not quite as grand a gesture as it first seems.
“The change in policy will certainly benefit those who have already accumulated large pension funds, or indeed encourage “retirees” back into work without worry of a future tax bill. The fact that the pension commencement lump sum remains the same means that those who are early in their careers – and early in accumulating – are still limited by what they can put into their pension. This is especially true if they are high earners and are impacted by the tapered annual allowance. The LTA is potentially a non-issue for people in this position and it will be interesting to see if more is done here in the future, particularly with relatively small moves in both the tapered annual allowance and money purchase annual allowance in this budget.
“That said, the revisions will undoubtedly have an impact on clients’ wider financial planning, but it has changed before, and it can change again. 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.”
Philip Dragoumis, owner of London-based wealth manager, Thera Wealth Management: “In terms of the pension reform announced in the Budget, both the increase of the annual allowance to £60,000 from £40,000 and the abolition of the lifetime allowance will ensure more people are incentivised to remain in work and save for their pensions and will not have any tax disincentives to stop working. The pension rules are also getting simpler, which is another real positive. There has been no change to the tapered annual allowance so the very high earners will still not be able to contribute, but everybody else will benefit. Overall, this was a very impressive Budget. Also, the fact that the OBR inflation forecast of 2.9% for 2023 is much lower than before is good news for interest rates and government bonds.”
Luke Thompson of King’s Lynn-based PAB Wealth Management: “The Chancellor has really pulled the rabbit out of the hat with the removal of the lifetime allowance for pensions. The general consensus was that this was going to be significantly increased but by removing it completely and increasing the annual allowance to £60,000 he will help a lot of high earners reduce their tax bills. In recent years, we have seen a great many customers get caught by the Lifetime Allowance and for them the logical thing to do has been to retire early. By increasing the allowance, the Chancellor has given a real reason for high earners to continue to work until their state retirement age.”
Joshua Gerstler, chartered financial planner at Borehamwood-based The Orchard Practice: “This is great news for those who want to invest for their retirement. The Lifetime Allowance penalised those who had invested diligently and sensibly during their working life and discouraged people from putting money into pensions. This removes that barrier. In addition, the increase in the Annual Allowance will encourage people to put more away for their retirement. Pensions are one of the most tax efficient ways to invest, and these policy changes make them even more so. Well done.”
Carla Hoppe, founder of employee wellbeing specialists, Wealthbrite: “Older, wealthier workers will be able to put more into their pensions while many younger workers are stopping pension contributions because of the cost of living crisis. While welcome for some, this Budget was a missed opportunity to help struggling young people build long-term wealth and secure their financial future.”
Pete Glancy, Head of Policy at Scottish Widows said: “Abolishing the Lifetime Allowance is a welcome development from today’s Budget and something we’ve been advocating for a number of years. The LTA was designed for a bygone era of low inflation and steady wage growth.
“Recently, it penalised savers who exceeded the threshold with a punitive tax penalty of 55%, even if their pots simply keep pace with rising prices. This drove senior professionals out of the workforce, draining the economy of much-needed skills, experience, and productivity.
“Its removal it will improve the fortunes of both working people and the public purse. Bigger pension pots not only mean more money for people to spend in retirement, they also mean higher tax receipts in the long run as the extra retirement income is also subject to taxation.”
