Today, several newspapers as well as broadcast media sources are reporting that the Lifetime Allowance for pension tax relief is set to rise in tomorrow’s Budget from the current frozen rate of £1.0731 million by at least half a million pounds. There are also reports that the Annual Allowance will rise from £40,000 to £60,000, though no detail has emerged yet on how low the allowance will be for those on the ‘tapered’ AA. It is also expected that the Money Purchase Annual Allowance will rise from £4,000 to £10,000 following industry pressure.
A combination of changes of this magnitude would be a ‘game-changer’ for the pension options of better paid workers according to LCP partner and former Pensions Minister Steve Webb. But he warned that the changes could have some unforeseen consequences. Whilst a key theme of the Budget will be a desire to encourage people to work for longer, allowing people to put more into their pension each year could allow some to reach a target pension pot sooner and be able to afford to retire earlier – the opposite of the Government’s intentions.
Commenting, Steve Webb said:
‘If these rumours are true, these jaw-dropping changes could be a game-changer for those who are currently limited when it comes to saving into a pension. Up to two million people who have already breached Lifetime Allowance limits, or could expect to do so, will now find it worth exploring saving more into a pension. A big change could also remove some of the complexities of the system, as those who had previously locked into Lifetime Allowances at £1.5m or £1.25m on condition of no further pension saving would be free to save more. The changes could also be a windfall for those with large pensions on the brink of retirement, who would now pay far less tax when they access their pensions.
Steve Webb forecast a ‘boom’ for the financial advice sector. He added:
‘Financial advice firms will be cancelling all holidays for their advisers as they will face a surge in demand following the Budget. In addition to the normal rush of activity to meet the 5th April deadline, this year people may be looking to review their pension savings plans not just in future years but even in the current financial year. We are likely to see a surge in interest in saving more for a pension and pension providers may also need to gear up to deal with the increased demand’.