Written by Nicola Butterworth, Advice and Compliance Director at ValidPath
There were a number of significant pensions and rate-related changes announced as part of Jeremy Hunt’s Spring Budget back in March, with the standard annual allowance, money purchase annual allowance and minimum tapered allowance all set to increase.
While some of the changes could possibly have been foreseen, the decision to remove the lifetime allowance (LTA) charges from 2023, as well as the LTA from 2024, seems to have come out of nowhere.
So, what implications will this have for savers?
Prior to this announcement, over their lifetime, savers could contribute £1,073,100 of tax relievable savings to their pension before being charged a LTA fee.
While removing this charge has widely been seen as a move to benefit NHS workers – to keep them in employment and prevent them from considering an early retirement to avoid breaching their lifetime allowance – the implications of this taxation change extend to the wider population, enabling people to build up their pensions as much as they can without fear of being taxed.
There are arguments both for and against scrapping the LTA. On one side, many people see the removal of the LTA as a good thing, arguing that this should improve retention rates within the NHS, with senior members of the workforce no longer needing to factor this in when planning for their future. They also argue that the change cuts out an array of complex pension rules, making pensions more understandable and subsequently more appealing to the general public, giving more incentive to work for longer. Not only will this benefit the economy, growing the UK labour market, but they also believe this will benefit individuals who, in working for longer, will be able to save more money for when they retire, ensuring a better quality of retirement.
Logistically, they also see the removal to benefit registered pension schemes, who will no longer need to comply with HMRC regarding certain tax administration tasks relating to the LTA. Taking away these requirements will save businesses hours of time, which they can instead put to better use.
There are a number of people, however, who are in support of the LTA, seeing it as an important way to prevent the wealthiest members of society accumulating enormous pension pots through avoiding tax charges. They are critical of the decision to scrap it, arguing that it has been made with the wealthy in mind, creating a tax break for them which could lead to a widening wealth gap between the richest and poorest in society. While opinions on the decision may vary, there is one thing that can be agreed upon – these changes come with a level of complexity and future uncertainty.
The transition period
As with any new tax policy, the initial transition will be difficult for advisers to navigate, with clients likely to have many questions regarding how this will impact them and their finances. Questions surrounding existing LTA protections can certainly be expected, and planned withdrawal strategies may need to be revisited. The LTA currently remains for the purpose of capping the tax-free lump sum, and any excess taken above the LTA in the form of a lump sum will be subject to an income tax charge. The most meaningful impact will therefore be for clients who trigger a crystallisation event but choose not to immediately withdraw their excess funds.
Policy reversal?
With the Labour party also immediately pledging to reinstate the LTA should they win the next general election (albeit singling out NHS workers as an exception), there’s also the potential that these changes could be very short-lived before they’re all overhauled again. If this were to be the case, then
what would an overhaul look like – would it be reversed in its entirety, or would the NHS be carved out as an exception? This would present a whole new set of questions, for instance, what happens to the people who go above the threshold over the next two years – will they be protected from a hit further down the line? Should advisers consider crystallising benefits sooner rather than later to take advantage of what may be a short-lived window of opportunity?
Reassuring clients
With no one quite sure how the removal of the LTA will play out, advisers are in a difficult position. When there are many unknowns, it can be difficult to decide on what the best approach is and for advisers to construct a robust financial plan. Ultimately, only time will tell how these changes will impact savers and so, for the moment, advisers can only advise on the rules that are in force. With this in mind, it’s important advisers don’t pretend they know what all the implications are. The best thing they can do is lay out all of the options for clients, who will have different instincts for what scenario they’d rather avoid should the policy change again.
