The lifetime cap on pension savings is to be scrapped, Chancellor Jeremy Hunt announced in Wednesday’s Budget, as part of a package of reforms designed to encourage older people to stay in work.
The lifetime allowance- the amount an individual can save into a pension tax-free during the course of a lifetime – was capped at £1,073,000, whereas it had been as high as £1.8million.
The Chancellor also increased the annual allowance from £40,000 to £60,000, while the tapered allowance, which affects very high earners, will rise from £4,000 to £10,000.
Lindsey Rix, CEO of Canada Life UK, said: “I am delighted the Chancellor has hugely simplified the pension tax landscape. This is a brilliant Budget which will not only help 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.”
The Chancellor’s shock announcement on the lifetime allowance is part of a raft of packages designed to encourage people who retired early during the pandemic back to work. It is also aimed at preventing workers, particularly NHS doctors, from reducing their hours or retiring early because of tax charges.
Jon Greer, head of retirement policy at Quilter, described the abolition of the lifetime allowance as a “real rabbit out of the hat moment” for the Chancellor, helping to ensure that senior people and higher earners are not disincentivised to work.
Greer said: “This represents the biggest U-turn on pension tax policy in a decade and for defined contribution savers, will come as a much-welcomed change. The lifetime allowance was applied to the value of the fund accumulated, including investment returns as well as pension contributions, and people can inadvertently exceed the threshold even if they stop actively contributing while still some way below it.”
The decision to scrap the policy is estimated to cost the Government around £2.7 billion over the next five years but will present a “golden opportunity” for high earners to fund more money into their pensions, says Greer.
In his Budget Statement, the Chancellor said he had listened to the concerns of senior NHS clinicians who had warned that unpredictable pension tax charges were making them leave the health service at a time when they are needed most.
Addressing the House of Commons, Hunt said: “I do not want any doctor to retire early because of the way pension taxes work. As Chancellor, I have realised the issue goes wider than doctors. No one should be pushed out of the workforce for tax reasons.”
Hunt said that abolishing the lifetime allowance will stop of 80% of NHS doctors from receiving a tax charge and simplify the tax system, while increasing the annual allowance to £60,000 would help incentivise people to stay in work for longer.
According to a Freedom of Information request by Quilter, 34% of all people who exceeded the annual allowance in 2019/20 were members of the NHS pension scheme.
Greer said: “The changes to the annual allowance, while once again aimed at high earners have a much more practical application and help to fix a significant problem with the NHS Pension Scheme and other public sector defined benefit schemes. Many doctors have been forced to pay huge tax bills as a result of how the scheme interacts with the annual allowance which definitely does disincentivise them to take on extra hours with some opting to retire earlier.
“Many who had ceased contributing to pensions for fear of incurring lifetime allowance tax charges may well be considering restarting contributions and together with a 50% increase in the annual allowance can make material tax savings.”
However, Greer noted that many people leave the workplace because they feel they have accrued enough money already and while they could increase their retirement wealth, they have decided to start their retirement a little earlier and accept the financial consequences.
“Whether an unlimited lifetime allowance changes this behaviour is yet to be seen,” he added.
But Alec Collie, head of medical at the Wesleyan Group, said the announcement “hasn’t come a moment too soon” for clinicians.
Collie said: “Coupled with the scrapping of the lifetime allowance, these measures should reduce the number of doctors having to leave their pension scheme, cut their hours or quit the NHS altogether because of high pension tax bills. We’ve been calling for an increase in these allowances for some time now and are pleased to see the government taking action.
“These changes will make a real difference to many doctors when it comes to the risk of receiving pension tax charges. We know many have already left the NHS Pension Scheme to try and avoid these charges and they should consider getting advice on re-joining the scheme to get access to valuable benefits.”
Graham Crossley, NHS pension expert at Quilter, said: “The NHS has played a critical role for the nation over the past few years during the pandemic. It’s only right that the government changed these unfair rules and eased its significant retention problems and stemmed the flow of doctors leaving the NHS in their droves, while actively encouraging those who retired to return and those who reduced their hours to take on more work.
“The changes to annual allowance and the abolition of the lifetime allowance tie in nicely with some of the changes already tabled in relation to the NHS Pension Scheme and will see many lifted out of eye-watering annual allowance charges and no longer have to worry about the lifetime allowance at all.”
However, some industry experts warned that the tax giveaway would only benefit wealthier earners and described the move as political rather than a considered pension policy.
David Brooks, head of policy at Broadstone, noted that that “tax bonus” for higher earners would likely work against the Chancellor’s ‘back to work’ Budget, with those able to save a further £20,000 in cash every year likely to build a considerable pension pot faster and in a position to retire early as a result.
Brooks said: “It is hard to escape the view that this package of measures is a political move than seriously, considered pension policy. It is overwhelmingly weighted in favour of the richest who will benefit from significant increases to saving potential. Given the UK already faces a pensions adequacy crisis, it is difficult to see how these giveaways are well-targeted to ensure the nation is in the best possible position to achieve positive retirement outcomes.”
The Chancellor has also frozen the maximum tax-free cash which pension savers can withdraw without any protection at its current level of £268,275.
Andrew Tully, technical director at Canada Life, said: “This caveat means the abolition isn’t quite as positive as it first appears. Allowing those with suitable lifetime allowance protections to receive higher amounts of tax-free cash doesn’t simplify pensions as much as we would have hoped, potentially retaining layers of complexity.”
However, advisers said the announcement would provide the retirement advice sector with a significant boost. Research by abrdn found that 39% of advisers said removing the lifetime allowance would be the most helpful tax and pension planning simplification for them and their clients.
Jonny Black, strategy director at abrdn, said: “This is a real opportunity for the sector to once again demonstrate its value in helping clients understand exactly what it means for them. Advisers – supported with the right tools, including platform technology – must be ready to respond to a surge in inquiries, and to help clients adapt their financial plans, as required.
“Conversations will also need to be had to ensure clients are fully prepared for the new tax year.”
