The highlight of today’s Budget was the abolition of the pensions lifetime allowance, as few were expecting chancellor Jeremy Hunt to make this announcement.
The end of the LTA means that people contributing into their pension pot will not face a tax-free limit of £1,073,100.27 on their retirement savings anymore.
It was widely welcomed by industry experts, although one or two remained cautious. Below, Trustnet highlights some of their views.
A rabbit out of the hat
Clare Moffat, pensions expert at Royal London, said the decision to scrap the LTA altogether was the ‘rabbit out of the hat’ moment that no one expected.
“While abolition was not expected, the government has acknowledged that too many workers in well-paid jobs are opting for early retirement or reduced duties rather than face paying punitive taxes on their retirement savings. This was particularly relevant to senior NHS doctors, a group vital to clearing hospital waiting lists,” she said.
“Allowing these people to save more money into their pension without a tax charge can only incentivise them to remain in work longer – a boon for both the Treasury and employers attempting to retain talent in a tight labour market.”
The government is on your side
Today’s reforms are the most significant retirement policy intervention since Pension Freedoms in 2015, according to AJ Bell head of retirement policy Tom Selby.
“The lifetime allowance has long acted as a drag anchor on strong investment performance and a deterrent to retirement saving, while also creating horrendous complexity in the system,” he said.
“Significant hikes in the annual allowance, and in particular the money purchase annual allowance, are also welcome and should help reduce disincentives for over 55s to return to the workforce.
“Taken together, these pension tax cutting measures amount to a colossal boost to savers and retirees and send a clear message to hard-working savers that the government is now firmly on your side.”
The changes reflect the modern day
Simon Harrington, head of public affairs at PIMFA, said the steps taken by the chancellor today gives consumers the right incentives to save for the future, and ensure that some are not forced to make a decision between saving and investing and remaining in the workplace.
“It is right that, having been frozen for so long, these allowances are reformed to reflect the modern day and we would encourage the government to keep the annual allowance under review on a regular basis,” he said.
“Going forward, it is vital that any future policy should not negatively impact on the ability of people to save and invest and we would encourage the government to look at other areas – particularly those that disincentivise individual share ownership – in future.”
Retirees should feel more confident about their money lasting the distance
The chancellor has given retirees a game-changing boost to how much they can save into their pension with the latest moves, said Verona Kenny, managing director at 7IM.
“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 more than 500 retirees, revealed that nearly one in three (31%) retirees are concerned about running out of money at retirement,” she said.
“The significantly more generous allowances announced today present another great opportunity for advisers to engage with clients to help them solve the retirement puzzle.”
It is very helpful for NHS staff
Paul Gordon, head of medical specialist wealth planning at atomos called the abolition of the lifetime allowance an “amazing response” to some of the issues NHS doctors and employees are facing.
“At first glance this looks very helpful for those senior NHS managerial staff looking towards their retirement planning and should, when combined with the recent NHS consultation, allow greater flexibility and options to continue increasing their retirement pots. It will become even more important to help staff understand their retirement provisions and peripheral benefits,” said Gordon.
“The Tapered Annual Allowance will remain, although the ability for negative growth in the legacy scheme to offset growth in the 2015 Section will reduce many annual tax liabilities. It will be imperative to ensure records are correct, particularly as the level of complexity continues to increase with NHS pensions.”
A welcome idea from the chancellor
Toyosi Lewis, retirement investment specialist at FE Investments, said that the removal of various limits on pension tax will incentivise those who are still in work to build up bigger pensions.
“The lifting and removal of various limits on pension tax relief in today’s Budget announced by the chancellor is a welcome idea. Whilst it appears to be aimed at those thinking about an early retirement to reconsider their plans, it also incentivises those who are still in work to build up bigger pensions.
“As defined contribution (DC) pensions become the mainstay of people’s retirement wealth over time and with the investment risk sitting with them, the importance of the above cannot be overemphasised.”
There’s a sting hidden in the documents
Not all were overwhelmingly positive on the news. While the pension tax cuts represent the biggest U-turn on pension tax policy in a decade, according to Quilter head of retirement policy Jon Greer, he warned there was a sting hidden in the documents.
“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,” he said.
“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.”
It won’t affect people’s decision to retire
Meanwhile, SG Kleinwort Hambros head of wealth planning Andrew Dixon noted that the changes will not make a huge difference to people outside of the medical profession on when they will retire.
“Outside of the medical profession it is unlikely to be a motivating factor or a key driver in the decision of when to retire. From a financial planner’s perspective, the more you can save in a tax-efficient manner the sooner you can generally retire. Most clients choose not to prolong their working life when they have achieved financial freedom.“Given all we know about the cost of tax relief, it also feels out of line with previous chancellors to both increase the annual allowance and remove the lifetime allowance. Not a year goes by without an article referencing the cost and subsequent prospect of wholesale changes to how pension tax relief is applied.“