"The lifetime allowance has become unfit for purpose in recent years and has increasingly caught middle earners who have saved diligently over the years."
The government will abolish the pensions lifetime allowance, Jeremy Hunt announced in today's Budget.
In addition, he announced that the annual allowance will increase from £40,000 to £60,000 and the Money Purchase Annual Allowance has been restored to £10,000, up from its current limit of £4,000. The changes will come into effect from April 2023.
The lifetime allowance is the maximum which can be held in a pension on a tax favoured basis. After being cut back from £1.8m to £1m back in 2012, the lifetime allowance was frozen by then Chancellor, Rishi Sunak, at £1.073 million in March 2021 and was due to remain at that level until 2026.
However, Steven Cameron, pensions director at Aegon, noted that the amount which can be taken tax free will be restricted to 25% of the current lifetime allowance of £1,073,100 (£268,275). "Allowing 25% of an unlimited pension pot tax free would have been excessively generous", he said.
Dean Butler, manging director at Standard Life, commented: “The lifetime allowance has become unfit for purpose in recent years and has increasingly caught middle earners who have saved diligently over the years. The change would represent a major shift in pension policy given the allowance was due to be frozen at its current level of £1.07m until 2026 but a combination of inflation and a desire to keep older people in the workforce looks like it's prompted a rethink. While the current limit may sound substantial, when converted to an inflation-linked annuity it would generate an annual income of around £44,000 to start with and many will aspire to more than this in retirement.
“Increasing the annual allowance by £20,000 to £60,000 is likely to be welcomed particularly by those looking to catch up on the retirement provision or for those with irregular earnings who are relying on making larger contributions later in their careers.”
Steven Cameron, pensions director at Aegon, added: "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. We’re hoping for bold increases as each of the allowances was far higher at some point in the past and if they 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."
Former pensions minister Steve Webb forecastd a ‘boom’ for the financial advice sector following the announcement. He added: "Financial advice firms will be cancelling all holidays for their advisers as they will face a surge in demand following the Budget. In addition to the normal rush of activity to meet the 5th April deadline, this year people may be looking to review their pension savings plans not just in future years but even in the current financial year. We are likely to see a surge in interest in saving more for a pension and pension providers may also need to gear up to deal with the increased demand."
Pete Glancy, head of policy at Scottish Widows, commented: “The previous allowances on pension savings, set at £1,073,100 and £40k respectively, were designed for a bygone era of low inflation and steady wage growth. Recently, the lifetime allowance penalised savers who exceeded the threshold with a punitive tax penalty of 55%, even if their pots simply keep pace with rising prices. This has driven senior professionals out of the workforce, draining the economy of much-needed skills, experience, and productivity. The Annual Allowance, meanwhile, has prevented senior professionals from being able to save more than £40k into their pensions each year.
“Increasing these allowances will improve the fortunes of both working people and the public purse. Bigger pension pots not only mean more money for people to spend in retirement, they also mean higher tax receipts in the long run as the extra retirement income is also subject to taxation. This significant increase to the allowances is a welcome improvement on previous Budgets, and will help to get the country’s economy back on track.
“I hope that this is the first of a series of annual reviews into the allowances, to ensure they keep pace with inflation so savers are not unduly punished.”
David Stevens, retirement director at LV=, added: “Scrapping the lifetime allowance (LTA) and increasing the annual allowance will be welcomed by pension savers throughout the UK.
“The freeze to CPI rises in the lifetime allowance (LTA) from April 2021 had disappointed many savers and many people will be celebrating the Government’s announcement to scrap the LTA. It penalised good investment decisions and removing it will simplify a complex pensions tax system.
“The increase to the annual allowance (AA) to £60,000 is also the first since April 2010, but it is still significantly lower than its previous highest amount of £255,000 12 years ago.”
