Thousands of well paid London professional workers approaching retirement were today handed a huge break by the Chancellor when he abolished the lifetime allowance (LTA) ceiling on how much they can put in their pension pots without being hit by punitive tax rates.
The “game changing” reform, which went far beyond what had been expected, will cost the Treasury £2.75 billion over five years in a tax relief largely benefitting higher paid middle aged workers putting money aside for their retirement.
Most commentators had expected an increase in the life-time allowance - currently set at £1.07 million - to as much as £1.8 billion but total abolition had not been forecast.
The move follows concern that senior professionals - particularly doctors and other highly paid workers on public sector defined benefit schemes - were being hit by huge tax bills that led them to retire earlier than planned. Currently pension contributions above the LTA are taxed at 55%.
In his Budget speech Mr Hunt said the abolition of the LTA would “incentivise our most experienced and productive workers to stay in work for longer. … and simplify our tax system, taking thousands of people out of the complexity of pension tax.”
In a broader package of changes Mr Hunt also increased the amount that can be put into a pension fund tax free each year by 50% from £40,000 to £60,000; raised the annual maximum that very high earning workers can put aside from £4,000 to £10,000. The amount that workers who have already started taking a money purchase pension can top it up by also went up from £4,000 to £10,000 a year.
The maximum tax free lump sum that can be withdrawn from a pension fund is fixed 25% of the current LTA - or £268,275. Any lump sums taken after that will be taxed at the marginal rate.
The shake-up was braodly welcomed by pension professionals but also faced criticism as a tax perk for the rich.
Gary Smith, financial planning partner at wealth management firm Evelyn Partners, said: “That the LTA was going up today, we knew: that it has been scrapped altogether is a bit of a rabbit out of the pensions hat.
“This and other limits to tax-beneficial pension contributions have created a number of distortions to both saving for retirement and career decisions for some higher earners, so the abolition of the LTA and lifting of other allowances should go some way towards easing those disincentives.
“The absence of an LTA from April will return us to a state of affairs that existed until 2006 when the limit was introduced at the level of £1.5 million before rising to £1.8 million in 2011. The removal of the LTA marks a welcome and unexpected change of direction as the LTA had been reduced in recent years, and was scheduled to be frozen until 2026.
“That policy has led to an increase in defined benefit pension holders, most notably GPs and senior NHS professionals, taking early retirement or being reluctant to take on extra work so that they don’t incur big tax charges.
“However, it has also been a growing concern for holders of defined contribution pension pots, and while the numbers breaching the LTA were small, that is probably dwarfed by the numbers who have ceased to save in to pensions before they reach the ceiling. As investment growth could take a pot above the LTA, not just the amounts contributed, that added further jeopardy for those who made good investment decisions. “
Aidan Sutton, Uk tax partner at accountants PwC said: "This may benefit some of the wealthiest workers to entice them back to work but it also, for once, represents simplification of a tax system which was creating perverse incentives"
Nigel Green CEO of financial advisers deVere Group said: ”This landmark budget will prompt many individuals to rush to review their retirement savings plans – and not just in the years ahead, but also in this current financial year.
“We expect a huge surge in enquiries from clients as they, sensibly, reconsider their strategies to take advantage of the scrapping of the lifetime allowance.”
“We welcome the scrapping of the LTA, which discouraged individuals to save for retirement.
“This development serves as an incentive to save as much as possible for retirement, as well as encouraging older people to return to the workforce, thereby boosting Britain’s chances of long-term economic prosperity.
“It also highlights that retirement finances are increasingly a personal responsibility.
“It’s becoming clearer that the government won’t be able to support and provide for its citizens as it has done for generations before due to an ageing population and shrinking workforce; weaker economic growth; rising living, health and care costs; less generous company pensions if they exist at all; and the fact we’re living longer, meaning that accumulated funds need to go further.
“As such, moves to encourage personal saving, such as abolishing the LTA, must be championed.”
He goes on to add: “The Annual Allowance, which is the most a worker can save in their pension pots in a tax year before paying tax, has also gone up to £60,000 from £40,000. This will also incentivise saving for the future which, again, must be applauded.”
Lindsey Rix, Canada Life’s UK CEO said:“I am delighted the Chancellor has hugely simplified the pension tax landscape. This is a brilliant Budget which will not only helps strengthen the UK economy, but will also boost the retirement provision of the hundreds and thousands of workers who may now be tempted back into the workforce.
“We made a clear call for an increase in the Money Purchase Annual Allowance and are delighted that the Chancellor was listening.”
But Leon Diamond, CEO of specialist lender for older borrowers LiveMore Mortgages said: “This ‘jam tomorrow’ tax break will offer little comfort to the majority of the 25.5 million people in the UK aged over 50, three quarters of whom say they feel unsupported by the Government and whose immediate concern is being able to keep their homes, put enough food on their tables or stay warm.
“The LiveMore Barometer – a detailed indicator of the financial concerns of Britain’s 50-90 year-olds – shows that nearly half are already being ‘hit hard’ by rising prices, which are eating into their savings and leaving them with ‘no cash for anything’ like travelling to see grandchildren, going on holiday or taking part in the hobbies which make their lives worth living.
“Unfortunately, the Chancellor’s pension tax break helps to perpetuate the perception that the majority of over-50s have had it easier financially and are comfortably off.
