The Chancellor Jeremey Hunt announced in the Budget (15th March) that the pensions lifetime allowance would be scrapped. This has provided a lot of pension advisors help. Many had thought it might be increased, but no one anticipated its end.
Introduced back in April 2006 the pension lifetime allowance created an additional tax charge for individuals once their pensions exceeded the allowance. Originally set at £1.5 million. The charge is 25% if funds remain in pensions above the allowance, but 55% for funds withdrawn from pensions above the allowance.
However, the Chancellor imposed a cap on the maximum amount of tax free cash at £268,275 which is 25% of the current limit.
The allowance has been changed over time. Rising to £1.8 million in 2012, but then being cut back to £1m. It has been set at £1,073,100 since 2020. Clearly the allowance affects very few people, but higher earners like doctors and consultants have been increasingly caught by the tax. Creating a disincentive for them to remain in the workplace and will give their pension advisors help. This is why the Chancellor says he made the change.
It will cost the government £135 million in tax revenue next year.
The Labour Party has said it will reverse the measure if it wins the next election. That doesn’t make for easy pension planning over the next few months.
In a further measure that the Chancellor claimed would help to keep more people in the workforce, he announced that the pensions annual allowance would increase from £40,000 to £60,000. This is the maximum a person can contribute into their pension in a tax year, including personal and employer contributions. If someone pays more in, they are subject to a further tax charge. 20% for basic rate taxpayers and 40% for higher rate taxpayers. Some say this only benefits high earners at the expense of ordinary taxpayers. The limit was as high as £255,000 back in 2010. But over the period of the Conservative government had been cut back to £40,000 before this increase.
In his final move to give pension advisors help and to encourage older workers to remain in workplace, the Chancellor reinstated the Money Purchase Annual Allowance to £10,000. This is the amount someone who is already drawing their pension can put back in each year. It was going to be cut to £4,000. This measure will be the most welcome to ordinary pensioners who are still in the workforce.
The Chancellor hopes that these measures will encourage up to 1.7 million people over retirement age to come back into the workforce. The governments believes that these are experienced workers who stopped working during the pandemic and who could make a big impact on economic growth.