In March Jeremy Hunt announced plans to abolish the £1.07 million tax-free pensions lifetime allowance to address concerns that set allowances are driving doctors and other professionals into early retirement to avoid large tax bills.
What do these pension changes look like?
The maximum amount someone can accrue in a registered pension scheme over their lifetime, will be abolished entirely from April 2024. Until then the lifetime allowance charge will be removed from 6 April 2023.
This is the maximum amount of tax-relieved pension savings that can be accrued in a year. It will be increased from £40,000 to £60,000 from 6 April 2023. Individuals will still be able to carry forward any unutilised annual allowance from the previous three tax years as at present.
Money purchase annual allowance
The money purchase annual allowance will be increased from £4,000 to £10,000 from 6 April 2023. This impacts anyone who flexibly accessed their benefits and then subsequently makes further contributions to their pension.
Pension commencement lump sum
The maximum pension commencement lump sum for those without protections will stay at its current level of £268,275 and will be frozen thereafter.
Why abolish the lifetime allowance?
Downing Street said it decided to abolish the lifetime allowance because it did not want to waste time by devising a bespoke scheme for doctors, which it said may not have been ready this year. It argued that there was “broad value” in the policy because it also applied to other professionals, including head teachers and air traffic controllers.
Will a change of government impact these changes?
Labour has said it would reverse the changes, saying they are a huge tax giveaway for the very wealthy. Reversing these changes would come with a number of complications.
Reintroduction of a Lifetime Pension Allowance (LTA) following a period of operating without one would require a new protection regime for anyone whose pension savings exceeded this “new” LTA. Assessing the value of benefits of all individuals close to or above the reintroduced LTA would be a massive undertaking, hugely complex, and burdensome for both pension schemes and HMRC.
The current changes mean that members can save substantially more into their pensions in a tax efficient manner, without the prospect of a large tax bill in the future.
However, if these changes are reversed then there could be implications for people who have amassed large pension pots. This current change presents an opportunity for individuals who have breached the old lifetime allowance and not yet crystallized their pensions.
Transferring a pension that was over the lifetime allowance would have been considered a ‘benefit crystallization event’ and triggered a tax charge on any amount over the allowance. Under the current rules, individuals could transfer their pensions without incurring this penalty, meaning there could be a rush of people with large pension pots taking advantage of the current rules to move their pension before the next election.
Ready to find out more?
If you’re approaching retirement age and wondering how these pension changes might affect you, it’s always a good idea to seek professional advice.
At Brite, our team of experts can help you understand your options and make informed decisions about your retirement plan.
Contact us today to schedule a consultation and take control of your financial future.