The pension lifetime allowance is expected to be increased in Wednesday’s Budget as the Chancellor seeks to keep people working for longer.
While the final figure remains unknown, it is understood that Jeremy Hunt is considering raising the allowance to £1.8 million, up from £1,073,000 currently.
The annual allowance, the amount each person can save each year without incurring tax, could also be hiked from £40,000 to £60,000, while the money purchase annual allowance could rise from £4,000 to £10,000.
Tom Selby, head of retirement policy, at AJ Bell, said: “After over a decade of persistent cuts to retirement savings incentives by successive governments, this finally looks like it could be a Budget that boosts pensions for hard-working Brits.”
The widely-anticipated measures are part of the Chancellor’s drive to prevent over-50s, particularly NHS doctors, from reducing their hours or stopping work altogether to avoid being hit by tax charges for breaching their pension allowances.
Selby said: “Raising the lifetime allowance beyond £1.5 million and the annual allowance to £60,000 would significantly reduce the risk of NHS staff being hit with a pensions tax charge for working extra hours. However, both the lifetime and annual allowance apply across all types of private pensions and so this announcement would increase the retirement savings limits for millions of Brits.
“It’s worth remembering that in 2010/11 the lifetime allowance stood at £1.8 million and the annual allowance £255,000, so even these increases wouldn’t take us back to those halcyon days. Nonetheless, any rise in allowances would represent a major and welcome departure from recent trends.”
Selby said the current MPAA cap of £4,000 has also acted as a “significant disincentive” to work and said reverting back to the previous £10,000 threshold – the level it originally sat at in 2015 – would be a “sensible, pragmatic step” for the pensions industry.
However, Selby noted that the constant changing of goalposts had not only reduced retirement savings incentives but had created complexity in the market.
He added: “There are currently three versions of the ‘annual allowance’, a non-earners allowance, a lifetime allowance and seven different versions of lifetime allowance ‘protection’. Raising three of these allowances would be a positive step in the right direction, but nobody would create a system that looks like this from scratch. As is often the case, complexity has built incrementally over the years.
“As automatic enrolment introduces millions of people to pension saving, many for the first time, there has to be hope that engagement levels will improve. If that happens, we need to make sure the system they engage with makes sense and is relatively straightforward to understand. Ideally, there also needs to be at least some confidence the rules won’t retrospectively change in the future.”
Steven Cameron, pensions director at Aegon, also welcomed the potential changes to the allowances, if they happen.
Cameron commented: “It’s now widely accepted that these ‘allowances’, which act as restrictions, can discourage individuals later in their working lives from staying in or returning to the workforce. Any increases to these will be good news and in line with the Chancellor’s aim to get this group off the golf course and back to work.”
Cameron said he was hoping for bold increases, pointing to the fact that if allowances had been inflation protected rather than cut back by previous Chancellors, “much more could have been built up in pensions to provide more comfortable retirements”.
