Lifetime allowance scrapped in surprise boost for pensions
Hunt gives a bonus to high earners as part of his package to persuade more people to rejoin the workforce
THE cap on lifetime pension savings is to be abolished by the Chancellor in a surprise tax shakeup, alongside a package of measures designed to bolster the number of people in work.
The lifetime allowance (LTA) currently caps the amount that workers can save into their pension tax-free at £1,073,100.
The Chancellor was expected to raise the cap in yesterday’s Budget, but in an unexpected announcement, Jeremy Hunt said the allowance would be abolished entirely from April 2024.
Mr Hunt told the Commons that he recognised strict tax rules over pensions were interfering with the labour market, including driving senior doctors out of the health service.
“No country can thrive if it turns its back on such a wealth of talent and ability,” he said. “But for too many, turning 50 is a moment of anxiety about the cliff edge of retirement rather than a moment of anticipation about another two decades of fulfilment.
“I have listened to the concerns of many senior NHS clinicians who say unpredictable pension tax charges are making them leave the NHS just when they are needed most. As Chancellor, I have realised the issue goes wider than doctors. No one should be pushed out of the workforce for tax reasons.”
Pensions unlocked
The abolition of the lifetime cap means that over the course of their careers, workers can contribute into their pension – and benefit from government tax relief – without incurring a penalty. Under current rules, any savings that breach the LTA are taxed at 55 per cent if the money is taken as a lump sum, or 25 per cent, on top of income tax, if taken out gradually.
The abolition of the LTA alone is expected to save taxpayers £2.75 billion over the next five tax years and could boost the pension savings of around one million retirees, according to estimates from the consultancy LCP.
Sir Steve Webb, a former pensions minister and partner at the firm, said the move was a “sea change” and would likely result in “a flood of new money into pensions from higher earners”.
He added: “A key point is that people who held off saving in the last few years because of fears over lifetime limits will be able to carry forward up to three years of unused annual allowances to increase the amount they can pay in.”
However, while the lifetime allowance will be eradicated, the tax-free lump sum workers can get from their pensions at 55 will remain capped at £268,275. It will be frozen at this level, which means that it will lose value in real terms over time to inflation.
So-called “pension freedoms” are thought to have “facilitated” a rise in early retirement during the pandemic, according to documents from the Office for Budget Responsibility.
It is thought the Chancellor’s move will lessen the appeal of leaving work as early as age 55.
Andrew Tully, of the retirement specialist Canada Life, said: “This caveat means the abolition isn’t quite as positive as it first appears. While the harsh 55 per cent tax risk is being removed, benefits above the tax-free cash level will be subject to income tax.”
The hidden inheritance break
It is thought the scrapping of the pensions cap will vastly increase inheritance tax breaks for married couples and civil partners. Pensions are 100 per cent exempt from death duty and experts say they will become an increasingly useful tool for savers looking to avoid death duties, levied at 40 per cent.
Sean Mccann, from wealth firm NFU Mutual, said: “It’s an even better IHT break than we expected. A lot of our more affluent customers are paying into a pension without any intention of actually taking out the money – those people will now be even more motivated.”
Official figures released alongside the Budget show this year’s IHT take is on track to hit a record £7billion.
Chris Etherington, of tax firm RSM, said the changes could prove to be a “big win for families dragged into the inheritance tax net through inflation”.
However, experts warned the generosity of the break could make pensions a target for reform in the next election.
Mr Tully said: “We have seen pensions consistently tinkered with over the years and the inheritance tax advanallowance tages associated with them could become a political football ahead of the next election. Taxpayers could maximise their pension pots now, only to find that the tax advantage rug is pulled underneath them later on.”
Annual allowance
Mr Hunt also increased the amount pension savers can put into a pot each year with a 50 per cent increase in the “annual allowance”. It was seen as a direct intervention to keep more senior health professionals in work.
The annual allowance has been a major obstacle for NHS doctors, who are unable to directly control how much money goes into their pension because they are members of a generous defined benefit scheme. Working overtime can trigger large, unexpected tax bills.
For many, the only way to avoid this has been to either reduce their working hours or retire early.
The annual allowance is set currently at a maximum of £40,000, but it will rise by 50 per cent to £60,000, effective from April.
Alec Cole, of the pension specialists Wesleyan Group, said these reforms would help stem the exodus of senior doctors from the NHS.
“From a tax perspective, this is just what the doctor ordered,” he said. “We know many have already left the NHS Pension Scheme to try to avoid these charges and they should consider getting advice on rejoining the scheme.”
Pension loophole to allow significant tax savings
Another complex rule, known as the “money purchase annual allowance”, will also change. This limits how much you can contribute into your pension tax-free each year if you have already withdrawn money from your retirement pot.
It has been blamed for deterring people who have retired early from going back to work, as it makes it harder to save. The limit will rise from £4,000 to £10,000 from April 6.
This could widen a tax loophole for early retirees tempted back to work, experts have suggested.
The “MPAA” rule was introduced to prevent people diverting their income through pensions in order to benefit twice from tax relief on contributions. But its low level meant some workers were unexpectedly drawn into its net.
Tom Selby, of pension firm AJ Bell, said: “It has been set at such a low level that it risked catching some fairly moderate earners without them realising it.”
For example, someone earning £50,000 who automatically saved 10 per cent of their salary, including an employer contribution, would breach the old £4,000 limit.
Mr Selby warned those taking advantage of the loophole to be aware that the takes into account tax relief and any employer contributions.
This means a basic-rate taxpayer whose employer does not pay into their pension could save £8,000 a year before hitting the allowance. A higherrate payer could save £6,000.
The allowance only applies to defined contribution pension schemes.
Rebecca O’connor, of retirement firm Pensionbee, said the change increased the possibility of people recycling their pension money, but that the benefits outweighed the risk.
“That’s why there needs to be an allowance of some kind – £10,000 isn’t huge though, and the benefits to people who genuinely want to boost their pensions at this time of life should outweigh the risk of the recycling opportunity being exploited,” she added.
Tech funding refresh
Plans to reform pension schemes to boost investment in high-growth technology companies, originally announced by Kwasi Kwarteng, were kicked into the long grass.
The £250million Long-term Investment for Technology and Science initiative, known as LIFTS, was opened up for feedback alongside the Budget. But final proposals will now not be announced until November as the project was pushed back. The scheme, which was first announced by Mr Kwarteng last September, aims to engineer new types of investment that can boost high-tech sectors with funding from savers’ pension pots.
Currently, British pension funds are underinvested in fast-growing sectors and venture capital funds, unlike rival firms in Canada and Australia. This means British savers may miss out on more attractive pension saving rates, while start-ups lose a potential source of funding. Mr Kwarteng originally planned to launch the call for proposals last year, with the funds to go live “as soon as possible” in 2023.
‘This is what the doctor ordered. Those who left NHS Pension Scheme should consider rejoining’
In a request for feedback published alongside the Budget, the Treasury suggested schemes such as the Government co-investing in start-ups or acting as a cornerstone investor in new pension funds.
Mr Hunt said he would “return in the Autumn Statement” with more details.
Disability benefit
It was also revealed that the Government would soon publish a White Paper to reform disability benefits, in what was described as the “biggest change to our welfare system in a decade”.
Under plans still being drawn up, the Government would separate benefit entitlement from ability to work and introduce a new voluntary employment scheme for 50,000 disabled people a year.
But claiming out-of-work benefits could also become more difficult, with reforms that could widen sanctions for those who do not look for a job or refuse a “reasonable offer”, as well as enforce stricter requirements for parents to look for work or take on more hours.
Sarah Coles, of the broker Hargreaves Lansdown, said the possible reforms represented a carrot and stick approach. “For those who rely on benefits to make ends meet, it’s not going to make life any easier,” she said.
“While tougher benefits policies may force more people to work more hours, it begs the question whether this will be a particularly enthusiastic, engaged and productive workforce.”
Isa allowance frozen
While pension savers benefited, other savings allowances remain frozen even as inflation and tax rises erode bank account deposits.
The maximum an individual can save into an Individual Savings Account (Isa) is fixed at £20,000 while Junior Isas and Child Trust Funds remain capped at £9,000. Any interest or dividends earned inside an Isa are free of tax.
If the £20,000 threshold had been increased with one year of inflation rises, it would be worth £22,000 today. If it had been uprated every year since it was introduced, then savers would be able to save £24,560 tax-free.
Jason Hollands, of stockbroker Bestinvest, said savers faced a “Vikinglike raid on the dividend allowance and capital gains exemptions”.
The former is dropping from £2,000 to £1,000 in April and the latter from £12,300 to £6,000.
The Chancellor has also frozen the £450,000 limit on the value of a first home bought with a Lifetime Isa. Lisas give a 25 per cent government bonus to those saving for their first home or retirement.