The changes to the pension Lifetime Allowance are having a “dramatic impact” on pension saving, according to Investec Wealth & Investment.
In March, Chancellor Jeremy Hunt reduced the £1.073 million cap on the pension lifetime tax allowance to incentivise people to stay in work, particularly doctors, with the proposal to scrap it altogether from April 2024.
Removing the £1.073 million limit on pension saving ended a disincentive for retirement saving which had led to higher earners retiring early and major tax penalties of 55% for lump sum withdrawals and 25% plus income tax for income tax withdrawals for those who breached the allowance.
Investec’s research among higher rate taxpayers found that the proposed changes to the LTA have prompted 59% of people to take action. More than half (51%) have restarted, increased or plan to increase pension contributions, including 16% who had stopped pension saving because they had reached or were close to the LTA.
Nearly a quarter (23%) say they have delayed their planned retirement or will probably delay retirement plans because they can save more into their pension and around 10% say they have come out of retirement as a result. A further 6% said they plan on coming out of retirement.
Ade Babatunde, financial planning director at Investec Wealth & Investment, said: “Scrapping the Lifetime Allowance was a surprise in this year’s Budget and it seems to have been very much welcomed by those who have built significant wealth across their pensions and by higher, and additional, rate tax payers.
“It’s worth remembering that the LTA was £1.5 million when it was first introduced in 2006 and went as high as £1.8 million at one stage so the gradual reduction meant it potentially affected more and more taxpayers and had a major impact on the amount they were willing to contribute to their pensions.
“Abolishing the LTA simplifies some decisions around retirement and estate planning but also makes it more important that people seek independent advice on pensions due to the changes in tax treatment.”
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