The Budget announcements made by Jeremy Hunt on pension allowances have made an already highly complex system even more so, says Nigel Green of deVere Group.
Green said the Chancellor’s unexpected abolition of the lifetime allowance (LTA), had been broadly welcomed “as it incentivises people to save for their retirement, which must be championed”.
“However, as is often the case, beyond the headline-grabbing statement, the detail has served only to make an already highly complex regime even more so, meaning those wishing to take advantage of this new development should seek advice in the first instance.”
He continues: “For instance, the Lifetime Allowance will be abolished, but this won’t happen in 2023/24.
“Instead, they have abolished the lifetime allowance tax charge which is 55% if you took the excess over LTA as a lump sum, or 25% if you took the excess over LTA as income. This income is taxed as well at your marginal rate. They will legislate at a ‘future fiscal event’ to remove the LTA entirely.”
The 25% pension commencement lump sum (PCLS), he goes on to say, is being fixed at £268,275 from April 6. That’s 25% of the current LTA of £1,073,100 and what many people still refer to as ‘tax free cash’. There is no indication this will ever get indexed. “So, over time, especially in high inflation times, this is going to degrade quite rapidly.” Any value drawn from a UK pension in excess of the PCLS is typically subject to income tax in the UK.
The Chancellor also increased the Money Purchase Annual Allowance (MPAA) from £4,000 to £10,000. This is aimed at pension members who have already drawn down using the 2015 pension freedoms.
They have also increased the minimum Tapered Annual Allowance from £4,000 to £10,000 and increased the threshold for adjusted income to £260,000. This is a restriction that caps high earners’ maximum contributions on which tax relief is given.
Green concludes: “The Budget has underscored the need for those looking to protect and maximise their nest eggs to seek professional advice.
“Whilst the Chancellor’s announcements are something we champion, the system has just become considerably more complicated. A much-needed wider review of the pension tax regime, which has become increasingly and unnecessarily complex in recent years, is long overdue and should have also been a priority for Mr Hunt.”
