Genuinely exciting developments today in the typically somnolent world of pensions. Chancellor Jeremy Hunt has announced he’s scrapping the Lifetime Allowance for Pensions.
Hunt is also significantly increasing the pension annual allowances.
As per Hunt’s 2023 Spring Budget:
- The government will remove the Lifetime Allowance charge from 6 April 2023, before fully abolishing the Lifetime Allowance in a future Finance Bill.
- The maximum Pension Commencement Lump Sum for those without protections will be retained at its current level of £268,275 and will be frozen thereafter.
- The government is also set to increase the Annual Allowance from £40,000 to £60,000 from 6 April 2023. Individuals will continue to be able to carry forward unused Annual Allowances from the three previous tax years.
- Finally the Money Purchase Annual Allowance will rise from £4,000 to £10,000 and the minimum Tapered Annual Allowance from £4,000 to £10,000 from 6 April 2023. The adjusted income threshold for the Tapered Annual Allowance will also be increased from £240,000 to £260,000 from 6 April 2023.
Together these are massive changes. Unusually sensible ones, too.
Good riddance to the Lifetime Allowance for Pensions
For anyone who is too young, who doesn’t earn enough – or who has more exciting hobbies to preoccupy them like macramé or reading obituaries – and so hasn’t been paying attention, the Lifetime Allowance for Pensions has long been one of the most complicated, counterintuitive bits of legislation in the whole tax maze.
See this summary of how the Lifetime Allowance works from The Details Man on Monevator. But set an alarm on your iPhone first –just in case you nod off while reading it and forget to come back.
Scrapping the Lifetime Allowance for Pensions on the grounds of tax simplification is good enough.
But the government’s avowed aim is to encourage older and typically higher-earning professionals to remain in the workforce for longer.
The thin end of this particular wedge has been the high-profile case of doctors. They have apparently been leaving the NHS in droves because, they felt, continuing to work no longer paid.
It was always more complicated than that. But suffice to say creating a fix just for medics would have sent an already cumbersome system into meltdown. Great for accountants but crap for the rest of us.
Plus it would hardly have been ‘fair’. Whatever that is taken to mean these days.
So – almost unbelievably after seven years of terrible decisions from the top – the Government has instead ripped the whole sorry thing up.
The Lifetime Allowance for Pensions was clumsy. It penalized investment success. It introduced all kinds of bureaucracy. And it was fully understood by no one.
We are well rid of it.
Less taxing for the moderately wealthy
I was as surprised as anyone to see the Lifetime Allowance for Pensions put to the sword.
But it’s particularly notable given the annual contribution allowance is being hiked by 50% to £60,000, too.
At a stroke, higher-earners can now defer a lot more tax – and for longer – than before.
However you can see these changes as potentially progressive if you squint a bit.
That’s because, as I noted above, the tax-free lump sum (nobody ever calls it the Pension Commencement Lump Sum) has been frozen.
It won’t even increase with inflation.
Presuming these changes remain in place indefinitely (spoiler: they won’t) then over time the 25% tax-free lump sum will become less valuable in real terms.
So higher-earners will be able to put more into their pension. But they will subsequently be taxed on more of it it down the line.
It gets rid of the complexity and edge case silliness of the Lifetime Allowance for Pensions. But freezing the tax-free lump sum means it isn’t all gravy financially.
The freeze of the lump sum allowance at a concrete £268,275 makes the increases in the other allowances more valuable for ordinary pension savers – who are more likely to have a 25% lump sum below that level – than for the very wealthy.
More flexible for today’s high-rollers
Still, this doesn’t make the other changes redundant for very high-earners.
If you’ve got a high but lumpy income, say – perhaps because you’re a freelance or an entrepreneur – or you expect to earn much more later in your career, then the extra headroom should be very helpful.
Tax relief on money going in makes pensions the best way to boost your retirement savings in a hurry. So being able to contribute more in a particular year (perhaps from savings) is a boon.
And while we must always remember that pension income is subject to taxation (unlike income that you take out of an ISA) there are ways to mitigate this.
So these changes do seem to be pro-enterprise. That is, the sort of thing we used to expect from the Conservative party before it was captured by its economically self-defeating lunatic fringe.
I said I was happy to see Hunt and Sunak take the reins after last year’s Mini Meltdown. This sensible suite of pension changes backs up that faith.
What do you think of the changes?
Of course the devil will be in the detail.
It will be interesting to see how the big hike in the Money Purchase Allowance might be put to use by FIRE1 types. Please share your thoughts below.
Also, I was already concerned at the growing stature of pensions as an inheritance tax (IHT) dodging vehicle before these changes were made. That light is now flashing red.
Presumably Labour will do something about it after the next election, and Hunt knows this. So perhaps it makes sense politically to let the opposition carry the can.
(I understand most of your lights flash green on IHT when mine flashes red. I’d rather let people get very rich on their efforts and tax the children who did nothing to earn it. Most of you seem to prefer to tax those who actually earn the money – given we have to tax somebody. Ho hum!)
Should we feel sorry for someone who bit the bullet and made decisions based on the existing system yesterday – or even this morning?
These changes always seem unfair to me on that front. It’s yet another argument for tax simplification – and then stasis, so we can all plan with confidence.
Finally, do you think it will achieve its aim of keeping people in work for longer? Perhaps that depends on how many people get the FIRE bug.
All told, these are the biggest changes to the pension system since the introduction of the pension freedoms a decade ago.
What do you make of them? Let us know in the comments below!
- Financial Independence Retire Early [↩]
Thank you for this swift review. I am looking at putting my SIPP into Drawdown next month and so make friends with BCE 3. Or so I thought.
Will this now be under the auspices of no LTA (and so no need for BCEs) or do I have to wait until it has been incorporated into the new Finance Bill? Or will the current LTA limit apply?
Thanks for any initial thoughts.
Thank you Monevator! Have we yet heard if the contributions limit of £3600 for the retired with no relevant earnings is to increase? As it’s not a spur to return to work my guess is no, but I cant see it mentioned as yet.
@TheSlowHare @Simon — I am going to wait for some of the regulars — and minor LTA gurus — to chime in on some of this stuff before I comment further, as we have people reading Monevator who (appear to!) do this for a living. I’m eager to see what others make of it, particularly these sorts of details.
The LTA charge will be abolished from 6th April 2023 while the lifetime allowance will be abolished the following year when the Finance Bill is approved.
Fully support bringing pensions within IHT, but leave an allowance of say, 500k. Effectively, force savers to spend anything above 500k or risk most of it going towards tax.
As a SIPP owner who escaped to live in the EU some years ago I am pleased to see the end of the LTA. I’ve not been allowed to pay into any form of pension for a long time and I live in a country where there is no tax free commencement sum. Until less than a week ago I was reluctantly considering switching the SIPP to the murky, high fee world of the QROPS as my only way to avoid the LTA. Now I can stick with what works.
> The maximum Pension Commencement Lump Sum for those without protections will be retained at its current level of £268,275 and will be frozen thereafter.
So. How’s that going to play with those with pots of more than £1,072K using UFPLS to withdraw their funds. Are we to complicate the mechanisations of withdrawing pensions with yet another limit of tax-free cash that may be withdrawn that needs bookkeeping for the duration of retirement?
@theslowhare from what I read from April 6th they will just not charge if you are over your LTA, but the Finance Bill will legalise it all properly.
Genuinely surprised by your take on this, as I think the change is borderline feudal. It principally benefits those aged between 45-55 but does nothing for the young, particularly when the young and successful – those with a high income that also want to build up large pension pots – are now going to pay 45p tax on a lower threshold and some of which still remain hobbled by a taper. This primarily benefits:
– those lucky enough to have final salary DB schemes (not CARE) with large accruals, of which a large amount of them are in the NHS and fall within the age range described above;
– those lucky enough to load their SIPPs pre-2010 with the AA was much, much higher (£250k) and there was no taper (introduced in 2016), who then benefited from QE are now sat on millions in pension pots, which they can pass onto their beneficiaries tax free from their estate and removal of the LTA makes this a genuine IHT solution for many of these. Again, they will principally belong in the age bracket above.
As a budget for the already wealthy 45-55 (and their offspring) it’s great. For those younger, who might be trying to make their own way with no inheritance to fall back on, and who are still paying punishingly (and rising) high marginal income tax rate on comparatively low threshold incomes, it’s galling to be told everyone has to pay their way when watching those with quite a bit receive, unexpectedly, windfalls of hundreds of thousands of pounds, particularly so when they know that they themselves have absolutely no chance to save such a pension given the taper.
Minor typos: “take the reigns”, and “being [able to] contribute more in a particular year”.
Simplification is always welcome, glad that Hunt has proven to be a steady chancellor even as his party still hosts a few economic illiterates.
Between my wife and I we have a couple of SIPPs each protected to £1.25m but well below the current LTAs… fortunate enough to generate enough income from other investments, so both are untouched to date as I planned to use them as IHT vehicles. But can see the writing on the wall to bring them into IHT after the next election, so will be taking out the full PCLS, giving it away now to children and hoping I/we last another 7 years… some certainty now seems to trump further political tinkering later..
I was half expecting to see something in the budget which brought forward the date of the State Pension Age to 68. There had been rumours it was going to be announced as part of the get-back-to-work-policy – the increase being brought forward from 2044-46 to around 2035. No news yet…
The only positive is the freezing of the 25% cash out. What should have happened is the NHS contract should have been changed to solve the bespoke issue, rather than further pensions changes. Pension changes should have been limited to LTA increase with inflation (given recent high inflationary enviro), increase of AA with inflation and abolition of taper. The rest is just a nod to the already asset rich.
The only possible justification to removal of the LTA in this manner could be if the full exclusion from IHT was changed, otherwise we’re just perpetuating generational inequality.
Well done TI for kicking this off so quickly. I’ll be very interested to hear what now happens at age 75 (BCE 5, 5a,5b) as I imagine will anyone who, like me, has overshot their LTA. They’re killing the lump sum just like Miras. Keeping it index linked would have been nice!
@Andy — We agree about the IHT issue. Otherwise remember that pension income is taxed. So people can defer tax in but the very high earners will very likely be paying tax coming out, too. I know you know this. And I don’t deny there’s a benefit versus the LTA nonsense. But the latter was not fit for purpose. Don’t disagree either that the Boomers had a better run of things and the young are in a tougher position. But perpetuating the LTA allowance is not a good way to half-solve this IMHO.
@Anthony @Others — Re: The timetable that’s my understanding too. I’m sure there’s some murk lying in wait though, hence my reluctance to definitely opine further for now. 😉
@Mr_Jetlag — Thanks for the typo spots. Annoyingly they made it into the email. 🙁
There was a bit of excitement earlier in the week over on the MoneySavingExpert forums that a move of the LTA from £1m to £1.8m might trigger a cash free lump sum pot going from £268k to £400k. That would have been generous and thus, with hindsight, was obviously never going to happen.
For those looking askance at my claim that this move is somewhat (if you squint, I obviously accept it’s not 100%) progressive due to the tax-free lump sum being frozen, here’s more detail on what I mean.
Let’s say that inflation runs at 3% over the next ten years. That will make the max tax-free lump sum worth less than £200,000 in today’s money, compared to £268,000 today.
So as your income/pension pot grows with inflation/returns, the percentage you can withdraw *in real terms* tax-free is going to reduce at a fair clip.
If your pot is say £500,000 though, it’s totally irrelevant. You can still take 25% tax-free, so you’re taking more of your pot, relatively speaking, without paying tax, compared to a higher earner.
The math on the erosion to inflation on the PCLS will be interesting – but let’s remember the LTA (and therefore the PCLS) was due to be frozen until 2028 anyway.
Also, many people taking the PCLS are probably planning to use it to clear a mortgage – which depends on mortgage rates and not inflation.
A £450K mortgage taken on at age 30, over a 40 year term at @4.5% will have £268K left on it after 25 years, when the owner reaches 55… setting them up nicely to pay it off early.
If inflation takes off their salary over that 25 years will likely increase, as will the value of their home.
It’s a trick. Get an axe.
Is this the bait to make people fill up their pensions, before the minimum retirement age to access them is swiftly increased to 58/59/60+
A good way to keep people working for longer…
I was surprised by the abolition rather than raising of the LTA. It’s a relief to me personally as I’m bumping up to it and was thinking of taking a final salary pension early (and so actuarially reduced) to make sure to stay under the LTA. Now I won’t have to. The capping of the tax free cash has probably been coming for a long time; although I didn’t hear any rumours that the tax free cash would be abolished, and those come round most years. I’ve always thought that a cap was more likely than outright abolishment. It will then be left to be eroded by inflation.
@theslowhare, I don’t think it really matters (although did you mean BCE 1?). The treasury document seems to imply that the LTA charge will be abolished immediately (ie from 6 April 2023), and that they will take longer to remove all LTA related legislation. Technically nothing will be final until the Finance Act has royal assent, probably in July, but the Act will have retrospective effect, and as a result there will be no LTA charge if you have a crystallisation event after 5 April. The provider may still need to track the crystallisation event and how much of the LTA is used until the next lot of changes
@simon I haven’t seen any mention of the minimum in the docs so far
I’m all for tax simplification, and the removal of arbitrary ‘punishments’ for success, I get the ‘lumpy income’ argument, and I shall be delighted if a few senior consultants and other executives are tempted back to work. The sheer, unbounded joy on Twitter among the few for whom this is akin to winning the lottery is palpable.
What I don’t get, in the current climate, is the total political tone-deafness of a budget whose main headline is a ‘sop to the super-rich’. What about the millions of ordinary workers on around average income, for whom the only bright spot is the freezing of fuel duty, who face the gloom and drudgery of a 6% drop in disposable income next year, as a result of the freezing of personal allowance, and removal of energy bills support, while inflation continues to erode the purchasing power of that income?
Why not, at the same time, a flat rate pension tax relief of 30% – a measure which really helps those for whom a £1M lifetime allowance is only ever an aspiration, and which is to some extent self-financing through the removal of higher rate relief. Headline: 50% pension tax break for all!
@Martin T — Yes, I’ve been sold on the ‘30% relief for all’ argument ever since the consultations back in 2015 (https://monevator.com/have-your-say-on-the-future-of-pensions/). I’ve never really heard a good argument against it to be honest. Of course some high flyers could be getting relief at 30% in and paying 40% income tax coming out. But we could probably put that into the nice problem to have category, especially with the higher rate tax band starting where it does now.
There is one pension change aimed at low income people, which is to compensate for the net pay relief anomaly. The policy doc summarises the issue as , “low earners with taxable incomes below the personal allowance can have different levels of take-home pay depending on how their pension scheme is administered. Those in schemes using Relief at Source (RAS) receive a 20% top-up on their pension saving (even if they pay no income tax), whilst those in schemes using net pay arrangements receive tax relief at their marginal tax rate, such as 0%. “.
I think there are going about this in a weird way, because they are paying compensation to the taxpayer, and it is in turn taxable. However it is good to see that the issue is being addressed at last
Raising the LTA alone would have benefitted senior doctors (Hunt’s enemies as ex-health secretary). Abolishing it completely feels like it benefits Hunt’s friends (the super-rich) more- not sure the optics on this are award-winning?
Do not forget the interaction with income tax, which is frozen (both rates and bands) until at least 2028.
Getting relief on the way in at say 30% to pay more on the way out (say 40% or even 45% marginal) with a reduced PCLS makes for some interesting maths IMO.
Not mentioned in the budget speech but in the fine print apparently (thank you Holly of Boring Money) was an increase in the recycling limit from £4k to £10K pa. Again quite sensible to encourage those who have already had to draw on their pension (perhaps due to loss of income during the pandemic) to be able to continue to add to the pension and get some tax relief if their work has returned.
@Al Cam – I agree, but, as TI says, it’s a nice problem to have. Anyone whose pension pays out enough to get into the 40% tax bracket has almost certainly benefitted from higher rate tax relief already, and you can choose only to draw up to the top of the basic rate threshold
@ColinThames — That’s in my article above. 🙂
I doubt the changes to annual and lifetime allowances will get people to return to work. Once one has experienced the freedom of retirement, and assuming one has got the sums right so there is enough money to live the desired lifestyle, why give that up just to earn money you don’t need. I accept the dynamics may be different if one is only considering retiring early and don’t appreciate how good it actually is. For me this is a regressive change that benefits the more wealthy, who already get a benefit by deferring higher rates of tax by paying into their pension. And whether within or without IHT, this is likely to lead to greater inherited wealth which further contributes to the divide between rich and poor.
For higher earners, the minimum tapered AA is now back to £10k, not £4k.
I’m fairly sure this wasn’t in the Budget docs when they were first released around 1:30pm but seems to have been added.
This is just a short term fix to stem the tide of the last 50 somethings on final salary not CARE pensions in the NHS from retiring in their 50s
You can bet the next government of whichever party will be revising pensions again
Interesting fact when considering doctors striking over low pay; changing the pension system for just doctors cost 60% of abolishing the LTA and increasing the limit by 50%
I’m not popping any champagne corks as much of this will be academic when the Tories are surely removed from office in 18 months.
The fact that individuals within political parties feel that they can independently meddle drastically with the long term financial planning of millions of families is galling. A cross party commission is the only way to make meaningful long term reform.
It’s also not lost on me that Hunt’s boss was the one actively crushing the LTA this time last year but removing the inflation link….. Which shows how much they’re making it up on the hoof.
@TheSlowHare Some of the details likely won’t be clear until the draft legislation comes out (due in a week or so I gather), but my understanding is that the sequence of events for the removal of the LTA will be:
– the LTA charge (i.e. the tax charge that arises if you have a benefit crystallisation event and don’t have enough available LTA headroom) will be removed with effect from 6 April 2023, presumably by this year’s Finance Act.
– the whole LTA framework then gets removed with effect from April 2024 – I suspect the reason this comes later is because there are quite a lot of references to the LTA in different bits of legislation/regulations, and so getting rid of these will be a bigger job.
@Simon – I haven’t heard any reference to that changing either; as you say, it wouldn’t really fit with the “encourage people back to work” goal.
Thank you @Nearly there, @Anthony and @Nebilon for the feedback on an effective date. And, yes, @Nebilon, it would be BCE 1 (not sure why I had in mind #3). Thanks for clarifying.
And thanks @The Investor for another timely piece, and shepherding the comments, too
Abolishing the LTA altogether was the right move. I believe the UK was unique in having a cap on pension end value as opposed to contributions, so it now joins the rest of the world in not having this insanity.
And despite the LTA abolition, the budget can indeed be described as progressive because of the PCLS freezing, which means that the biggest pots will end up with a tiny % of tax free lump sum, and thus the only benefit is tax deferral (which for the highest earners may end up being close to zero).
@NC @Others — I think it was in the docs, and again it is in my article above.
Also interested in the £3600 pension question. Anyway, yay for market downturns at new ISA time of year.
As indicated above, my understanding is that quite a few types of lump sum subject to beneficial tax treatment are limited by the LTA, and so a lot of changes to legislation will be needed to work through how this applies to each going forward if the LTA is removed.
Regarding whether this benefits the older more than younger workers – I’m in my 30s and chose not to fill my Sipp last year as when looking at 30 years of 5-10% returns, the fixed £1M pot would get hit from compound interest alone doing the heavy lifting.
It definitely benefits the rich more though, can’t be arguing about that!
I’ll be interested to see impact on investment decisions in next few years. From memory, average VCT / EIS investment is sub £20k per year so those people may switch to pension top ups. Likewise BTLs – for those in high paid careers in their mid-40s with 20+ years in pension contributions, the life time cap pushed them into alternative investments like BTL & FHL, so are we going to see a drop off there?
Great, the annual allowance going up to 60k clearly benefits those who have paid off their mortgage, have low lifestyle costs, and are short of the ideal pension valuation. This cascades down the age bracket too…
Won’t make me vote for the Brexit party though 😉 that’s a cost that can’t bribe me.
It’s a massive tax cut to the rich, that’s what it is. I get that the system was a bit messy and some kind of reform was needed, but to abolish it altogether? Echoes of Kamikwaze. You can still save money when you reach the Lifetime Allowance, why do you need tax relief to do so?
With a toddler (21 months old) I was hoping to see more free childcare as I’m paying £1062/month, but the new free childcare doesn’t start to come in til April 2024 and even then only 15 hours, the full 30 hours doesn’t arrive for 2 and a half years! They might as well have not bothered, we’ll have a Labour govt by then anyway.
Meanwhile the tax thresholds are frozen so I’m paying more and more at the 40% rate.
The only good news today is that inflation is forecast to drop to 2.9% by the end of 2023, no thanks to the Tories. The sooner they are kicked out the better.
A small question. The BBC article on the pension changes says that the pension annual allowance is currently £40,000 “for the year ending March 31st”. That’s not right, is it? Everything else works on the tax year ending April 5. I care about this one because I’m trying to max out my contributions and there will be a deduction from my salary payment on March 31 that my employer may or may not manage to pay into our DC pension scheme by April 5. I spent April 5 last year watching my workplace pension account, debit card at the ready to pay extra into my SIPP if the payment didn’t go into my workplace scheme. If the closing date is really March 31 there’s no way my March salary deduction is getting into the pension scheme in time.
One thing I don’t understand is that the aim is both to encourage people to stay in work for longer, and to encourage people out of retirement. I can see that abolishing the LTA may encourage some to keep going, but those who return to work having started to withdraw from their pension fund are hit by MPAA rules. Yes the limit has been raised to £10k, but will that be enough to tempt those who have tasted the pleasures of retirement?
Little progreesive about this budget. It’s just a dressed up version of what has gone before from that side of politics… tax breaks for the prosperous, and puntive measures against those less fortunate.., via more ‘rigorous’ measures against job seekers. I’ve never, ever, been able to get my head around why affluent people need tax breaks to encourage them to work, while poor people are assumed to be lazy, therefore need punitive measures to make them work.
The reality is that the tide of history has already washed over this party of government…., have you noticed lately that hardly anyone now talks of ‘benefit scroungers’. The reality of what it’s actually like trying to get by on universal credit has dawned on the previous sneerers who now feel what inflation is like.
@trufflehunt @others — I am not saying the Budget as a whole is progressive. I’m just saying to see the scrapping of the LTA in the round. 🙂 By far the biggest reason to get rid of it was that it was terrible, confusing, and counter-productive legislation. But in conjunction with the lump sum freeze it has nuance. And increasing the annual allowance *is* useful given the more flexible incomes many of us now have.
I don’t think we should take this useful thread off in a political direction, but just for the record as I did offer some positive words about Hunt and Sunak in my article, the Brexit debacle alone is enough to earn this party some time in the wilderness for me, before you even get to the farrago of the past three years.
Sunak and Hunt look like giants in comparison to all that banana republic nonsense, but as far as I’m concerned they’re night watchmen ahead of a new administration.
I am in the fortunate position of being a top bracket earner age 30 but can’t help but feel this Budget’s pension changes still do nothing truly to incentivise further pension contributions above ISA contributions (I am currently maxing out mine and my wife’s ISA each year instead of lumping this in pensions). Eager to be told otherwise, but why would I now prioritise pension when it is locked away until 57 (likely 62 by the time I retire) and strong likelihood of tinkering until then, irrespective of current LTA abolishment and related improvements? It’s just too much of a gamble when you are at the mercy of politicians and it is illiquid. I have a regular debate on this point in context of depositing 40k amount in pensions vs ISAs and it just seems ISAs win (albeit while continuing to have a steady workplace c.3% pension contribution ticking along in the background).
Happy to see the end of the LTA. I’m retired but not taking my pension yet. The LTA (if you’re lucky to have pension fund amounts anywhere close to it) seemed to complicate decisions about the best way you should take money out of a SIPP in drawdown with all the various tests against it – decisions whether to do UFPLS, crystallise the whole lot, do phased drawdown etc. If you just want to take small amounts out of the pension leaving the bulk of funds invested for growth the various LTA tests get quite confusing (to me anyway). I think with this change I can just do UFPLS withdrawals as needed and not worry about the LTA. The folks who do all those YouTube videos explaining SIPP drawdown and LTA are going to be out of business perhaps!
None of this stuff tempts me to un-retire. I stopped work because I had enough (had enough of work and enough to retire on!).
£1m pension pot with a 4% withdrawal, is not really super rich territory. But if you are over the LTA at age 55 or 60, then you need to consider the BCE test at 75. That leads you to withdraw up to the 40% income tax threshold. Now consider going back to work. You pay 40% tax on the first pound you earn. I’m not judging the rights and wrongs, but that is the lack of incentive problem.
I’m surprised there is not more chatter in the comments about the changes in AA taper. Currently if you earn £280K gross, you can only put £20K in your pension. (40-[280-240 *0.5]). Next year that rises to £50K (60-[280-260*0.5]). That’s pretty big news for those in the upper middle class.
Well, well, a massive bung to the rich, who have thunk it?
This government truly has run out of ideas.
Few people will have a problem with simplification as being a good idea. Few people will have a problem with giving people more options.
Almost everyone should have problems with pension rules being changed at will, whether the changes are good or bad. Today you might be a winner, in 1, 2 or 5, or whatever number of years, you might be a big loser. This is not the way to encourage pension saving.
Like others have indicated, maybe we should be reducing tax breaks for the most wealthy but otherwise simply going back to basics and establish the principles of the pension system they are wanting to work within and then committing to locking in a system that achieves those principles, and let it be?
I personally am getting tired of the reality of pension system gaming. I am not even a super high earner but why should I get pension tax relief at 41% and 12% NI via salary sacrifice so I can potentially withdraw at a much reduced rate (conditional on the subsequent tinkering not removing it)? Do people not see how stupid this whole situation is becoming, particularly when most pension gaming does benefit the most wealthy the most?
Every single change to the pension system chips away at the idea of retirement *planning* using pension vehicles as today we might be ‘winners’ and not complaining, but next time we might be the losers: annual wealth taxes over and above income taxes next time anyone to help fund the cost of pension allowance increases?
I really don’t care as much as most on this forum as I am not ambitious enough to ever get out of the moderate income bands, but in the future when you are ‘robbed’ as rules are changed because the vast majority of the country votes for a government that is more focussed on wealth redistribution instead of making changes that do not really benefit them, do not be surprised or complain. Nobody ever defines what ‘fair’ means these days, but having choices about how you arrange your pensions to minimise tax reeks of inherent unfairness in the system and will only lead to massive reversals in policy and laws in the future when enough people vote for change. As someone sitting in the middle that might benefit by a few extra thousand pounds a year in a good year due to tax planning, I barely am impacted or even care that much. I am not naive enough to think that constant tinkering, overhauling or messing about with pension rules is a good thing – it isn’t, and when the rules next change to your detriment, don’t be surprised or complain. No one can ever win when the rules of a game are not defined, and this is the world we live in with pensions. The inevitable end of a game with no rules is people choose not to be that interested in playing.
Interesting budget. Can’t help but feel for any poor sods turning 75 in the next 3 weeks before 6 April and triggering a BCE. Along with everyone who’s already fallen foul of LTA charge of course, but that must be particularly galling.
Oh Labour have come out this morning and said they’ll reverse the LTA abolishment now except for Drs. How are you supposed to plan properly if the rules can just change every couple of years?!
One major unfairness in the pension rules was the disparity in valuation between defined benefit (value generally taken as 23 x pension) and defined contribution schemes. The former are usually public sector and the latter private sector. So with say £1,000,000 LTA the defined benefit person could have a pension of approx £43K much much higher than that available to a defined contribution person living off investment returns or buying an annuity.
Getting rid of the LTA has addressed this imbalance in tax treatment to some extent at least. For that reason alone I welcome it.
Labour have just pledged to reverse the LTA abolishment. Hey ho – as you were (unless you intend to retire pre-2025).
Reminds me of that Orwell phrase that starts “all animals are equal, except …..”
Looks like the LTA will remain ‘messy’ for some time yet!
I think the view not to bother with pension saving because of frequently changing rules is a bit narrow minded. All tax rules are subject to change. Why save in a pension? Well, to use the money later in life or to pass on to your heirs. How else do you put money aside to use later on or sacrifice your time working long hours now to help your children later? ISA? Subject to change. Buy property? CGT/stamp duty/rent income offsetting BTL mortgage… subject to change. All taxation is subject to change by politicians.
Perhaps we should encourage high earners to save as much pension as possible now so that when means tested state pension comes in, it won’t be seen as so ‘unfair’.
Will Starmer distinguish between a doctor and a surgeon? All those psycopaths getting tax cuts, mmm. Or maybe it will just be a rule for anybody who is paid by the NHS, regardless of how much their additional income from private healthcare. Or maybe just for GPs. Tax cuts for the doctors but not for the nurses. It all sounds very labour to me.
@TI “Sunak and Hunt look like giants in comparison to all that banana republic nonsense, but as far as I’m concerned they’re night watchmen ahead of a new administration.”
The new administration has indicated it will reinstate the LTA. If so, then this welcomed tax simplification may be short lived.
The message is that people are considered “wealthy” if they reach c. £1m in a pension after working for 40 years. A pension that could provide a safe withdrawal rate c. £35,000 p a. and this is a benchmark of wealth under a capitalist system that trashes everything from water in rivers to the health service.
I agree, MWN. £1m in a pension is going to give a comfortable, not lap of luxury, retirement – and perhaps not less than that if you are living in London perhaps.
It won’t affect me, when I realised I had a strong chance of bumping up against the lifetime allowance – I reduced my hours (and have reduced them again post-pandemic). Hollow laugh at the thought of increasing them again.
The thing with not working full-time is that once you’ve got a taste of it (and assuming you’ve got any kind of life outside of it), you won’t want to go back. Some will be persuade back, others will not.
As others have suggested, being able to work, take your pension and still contribute to it in a meaningful way might be more appealing. But perhaps less so to HMRC.
Chatter so far (esp. from Labour) suggests that Hunts apparent attempt to stem the tide of some early retirees by removing the LTA could well backfire and people will be queuing up to go before the LTA is re-introduced. Likewise, his so-called MoT’s IMO could encourage some people to jump ship early; rather than ‘frighten’ them into staying put – which I assume is the unstated intent of this particular piece of nonsense!
@Al Cam, but that would be labour’s doing, not the tories.
So, how long do I need to be a ‘doctor’ before I have my LTA abolished and can set up a private clinic, Sir Starmer? Oh, and is it ok if I train abroad, become a doctor there and then come to the UK to work in private healthcare?
In my earlier comment #14 I had wrongly assumed that the removal of the LTA would not apply retrospectively and so those already 100% crystallised would have to play by the old rules. Indeed, if we’d seen the LTA rise to 1.8m then I’d still have expected to be charged on my non-crystallised pot. So, now that I’ve read everything properly, imagine my more than pleasant surprise! I still can’t quite believe it though as this does absolutely nothing to tempt me and my peers back to work especially as IHT benefits will undoubtedly be curbed.
Was hoping for a swift article to kick around thoughts.
I think I’ve been through the full cycle of emotions from “Wahoo this changes everything!” to “don’t get derailed stick to your original plan” to “be very wary that this doesn’t change back and sting you”.
While declaring an obvious personal interest that this probably makes life easier for me and stops me worrying about having to immediately crystallize DC pension on hitting 55 and then manage withdrawals carefully for future growth, I’m not sure it will act as a back to work charter.
It is clearly better for those who would like to take on or continue roles to be able to do so without further convolution around “work pensions” and it addresses the absurdity of people being taxed out of their jobs. The unfairness to DC/SIPP pensioners who’ve striven and sacrificed to build their pot compared to DC pensioners is done away with.
Unfortunately as Labour are already making it the main fatcat target of the response I think there may yet be further movement on it. There is such basic financial illiteracy that people don’t seem to realise that a £1m pot is hardly champagne in your Lambo served by a supermodel money and merely equates to a moderately comfortable annuity.
Personally don’t know. Might just take the opportunity of loading in £60k for next tax year then pull the ripcord anyway.
Labour committing to reinstate the LTA when they are in power is good – it’s either that or they remove the exclusion of pensions from IHT. Doing one without the other is inexcusable. It’s about time we had a govt that begins to focus on wealth and not solely income. I am in my 30s and earn well into the 45p tax bracket so much so that I am fully tapered out – pre and post these changes – but I have no generational inheritance or other money and have just seen those 15-20 years older than me receive hundreds of thousands in freebies whilst, once again, I’m bearing the brunt with new income tax changes as a cash rich, asset poor (comparatively) younger earner. I am frankly tired of watching successive Tory govts give a small nod to the average income earners through beer duty and childcare tweaks whilst maintaining the ultra lax tax breaks and handouts (that most don’t understand so they don’t cause any noise, unlike the 45p tax cut) on the wealthiest of a particular generation that don’t earn large incomes but are nevertheless very wealthy (think the traditional stores of wealth such as property, pensions). Instead those through PAYE are slammed every time. I’ll be voting Labour for the first time in a good while – this govt is devoid of ideas.
>Oh Labour have come out this morning and said they’ll reverse the LTA abolishment now except for Drs.
Every time I think it would be good to oust the Tories, Labour come up with something like this. How on earth can they justify different tax regimes based on profession. As if the system isn’t enough of a mess already.
The removal of the LTA seems sensible to me, even though I’m well under the limit. Having an annual contribution limit and lifetime allowance always seemed odd. Increasing the annual allowance to £60K does seem a bit of a bung for the rich, when you consider the median wage in the UK is only £32,000.
Typo in my post above second DC should of course read DB.
If Labour do make reintroduction of LTA a firm policy isn’t it going to wreak havoc? You’ll have a bunch of mid to late 50s scrabbling to quit while there is a window regardless of whether they really want to.
I can see the logic of having an LTA but at a sensible level something like £1.5m (plus annual inflation) would not be unnecessarily punitive on the lifelong savers.
We’re making an assumption Labour’s reversal will implement the current level and fix it. A higher LTA (1.5 – 1.8m plus annual inflationary increases) is entirely justifiable. The Tories’ complete abolition is perplexing – the cynic in me notes that Jeremy Hunt is 56.
I don’t know why they didn’t just follow the advice of the OTS and remove AA for DB pensions (but keep a modest LTA of 1.8m). And remove LTA for DC pensions but keep a modest AA.
Would suit doctors. And it would make sense for private sector DC pensions too.
It seems a LTA charge is still levied (at ones marginal rate) on any excess on death.
Any idea how the excess is calculated if one is 100% crystallised having previously taken out Fixed Protection?
I had FP of £1.25m and took out £312,500 as the tax free lump sum so, until yesterday, had thought I was due to pay 55% on anything over £937,500 on death or reaching 75.
With LTA abolished is the calculation now “pot value minus £1.073” or does it remain as above?
I was in your shoes until very recently, so I can understand your sentiment. I was well above the fully tapered AA, with no family wealth, just slowly building my own over time, mostly outside tax wrappers (of course maxing out ISA/SIPP, but bulk of money unsheltered). I too felt unfairly treated tax-wise, not rich enough to benefit from big loopholes, but considered too rich to keep more than half my earnings or receive any other benefits such as child credits etc. Also felt it was very unfair that asset rich people were taxed more lightly because they didn’t have any “income”, and I definitely felt I was the squeezed middle.
Over time this sentiment eased. Partially because even after paying half of my earnings in taxes I still had significant savings and accumulated significant capital. Projecting far ahead in the future I could see that even within the limited tax breaks I enjoy, my effective tax rate would decrease. Would it be fairer to have capital taxed more than labour? Yes, absolutely, at least from where I was sitting, having all my income from labour. Would I like this change to happen when I have more of my income from accumulated capital? No! Changing the rules of the game in the middle is arguably worse than having unfair but consistent rules from the start. If there was a very high Land Value Tax for example, and lower income tax as a result, it would be fair. But if you suddenly introduce a drastic measure to that effect, it will be very unfair to the poor soul that was taxed at 45% until he saved enough to buy a house, then retire, and have to pay the house twice over via LVT while the younger workers are only taxed at say 25%. Same thing with the pensions, possibly even more so. Tinkering with them and changing the rules, or even threatening to do so like Labour does today, is extremely counter productive. Makes planning impossible, and amplifies the feeling of unfairness.
From a more practical point of view, if your sentiment has more to do with the fact that your pension balance is low and won’t benefit from the LTA lift, you are rooting against your future self, because chances are you will also get there, even with putting only 10k/yr in your pension for a while. Eventually you will be able to put 60k in a year that you take a break or downshift, unless of course you continue being a high roller until you retire, in which case the pension would be immaterial anyway. I recently downshifted, still a 45% tax payer but will probably not have tapered AA next year and I will be able to contribute more to my SIPP. Had the LTA stayed I expected to bump against it right about the time I would be able to draw from it in about a decade from now, so I wasn’t going to contribute any more, but now I will. So you can say that the fact I welcome the abolition of LTA is because I will personally benefit from it. When (not if) you reach the same point, your sentiment may change as well, so be careful what you wish for.
Andy, don’t worry, all the properties those rich boomers own will be taxed at 40% above £500k for all the single divorcees when they die because the IHT threshold is frozen. Their heirs will only have 6months to pay the IHT owed and cannot use any of the estate assets to pay it other than cash. Will they have been granted probate in that time? Doubtful, ha-ha!
If leftover pension pots are still excluded from IHT (could that be called child care?), it will still get income taxed when extracted by the next gen so not tax free.
Thank you for being one of the 10% of earners paying 60% of total income tax for the country. It is little appreciated by many.
@mp, you are a far better diplomatic adult than I! 🙂
Very good comment and a lot to think about, so thank you. Whilst I largely agree with the overall sentiment that our opinion on these matters is self-interested at a particular time, I am conscious that we have an ageing population and we as a society still struggle on a macro level with the incompatability of the desire for a large state with low levels of taxes (for most). The change to capital and assets is coming as it’s inevitable with an ageing population and post-QE asset inflationary environment – with that in mind, I’d rather they begin this process sooner rather than later.
@Always Late – gift your property to avoid IHT. I have no issue with people paying income taxes on money they didn’t themselves earn.
I started my career with an employer that had a career average defined benefit pension. People posting here talking about ‘fairness’ seem to not understand some of the significant issues. If I die before state retirement age I get from this scheme zitch, zero, nothing. As I am not married this pension has zero value if I die that I can pass on, I can’t access it early, nor can I draw down money, nor can I alter anything about it, I could not even increase or decrease the contribution rate which was a fixed proportion of my salary. I never accrued much at all in that scheme and moved to a FTSE 100 company soon afterward doing almost the same technical work in my starting position with the company at about 2 grades of equivalent responsibility lower, for more money. Every penny I now put in my pension comes with the many benefits of a defined contribution pension.
I am posting this to make the point that everyone is looking at this through the lense of perceived unfairness to you as an individual, when I can be sure for many people if the option was either 40k a year with huge restrictions (including limited, if any, way to pass on at death) and only if you make it to state pension age, or a £1m pot with all the pension freedoms, the choice wouldn’t be so easy.
The think tanks have already pointed out some potential problems and we in the FIRE community should see them too – if your aim is to be efficient and become FI as soon as possible, the changes make it easier for many people now. These people may actually leave the workplace earlier, assuming they have the ISA and pre-pension access funds sorted. It is not even clear the budget will achieve what it is trying, overall, and at sensible cost – maybe we will get a few extra years out of doctors. Perhaps.
I think this can be looked at through a wider societal lens rather than just a “politics of envy” lens. If I end up with a pot above the current LTA it’s because I made sacrifices to prioritise my pension and future wellbeing rather than maximising my cash and leveraging that into the biggest house I could buy (or BTL portfolio etc etc). No one would suggest that someone living in that big house in a nice postcode should suddenly pay more tax even though they might be quids in when they sell up tax free and downsize.
Either its a good thing for society for people to take responsibility for providing for their future or it isn’t. If it is then pension rules need to be stable and not political toys given the time horizons involved. I’m of an age where I couldn’t really benefit from any of the LTA protections because I was still in accumulation stage (and finally had enough financial security to turn on the taps on contributions) so I see this as only getting back what others older than me always had. I hope I’m going to be fully able to self support a decent but not extragent life in retiremement (being also of the generation that has had state pension age put back) regardless of whether further political tinkering sees the state pension “promise” be broken.
I don’t think any of the envy around the commentary on this LTA move being for the wealthiest and least deserving is grounded in reality. The inflationary freeze on LTA following its bottoming was in danger of dragging many people into it in their lifetimes. And in 20 years time £1m in a pension pot might be a relative pittance especially if we go through another period of ruinous inflation. And its pretty unlikely that anyone hitting the LTA hasn’t paid far above average rates of tax already on their non pension earnings.
It’s taken the government long enough to wake up to the unfairness of the pensions cap and the problems it caused. When the pensions cap was introduced in 2006, I’d contributed to my pensions within the available limits for over twenty years, so I didn’t appreciate this moving of the goalposts. Getting tax relief to put money in and being taxed on the pension being paid out seemed fair and sufficient. Being taxed on the successful growth of my pension seemed unfair. Initially the cap was set high enough to not be a particular concern to me but once it began to be reduced and continually meddled with then the political risk was clear. I welcome the governments proposals but with Labour opposing them the political risk remains.
I’m struggling to see the equity and morality behind Labour’s proposal to use discriminatory taxation policy based on one’s chosen profession. I was considering voting for them… Can anyone explain how that could possibly be justifiable?
@ Vic Mackey – Not only is it totally unjustifiable but the ridiculousness of it doesn’t yet seem to have hit home with either the labour party nor anyone in the opposition or media questioning them. The suggestion that one profession should have a different set of tax rules than others is absurd and that’s before you raise the question of how it would be implemented and policed. Total nonsense which undermines labours credibility in my view.
Will be very interesting to read the manifesto for the next election as the opposition seem hellbent on redistributing wealth by pulling those at the top back rather than lifting those on lower incomes. A race to the bottom if ever there was one.
I agree it’s not right to single out individual professions for special treatment – but didn’t Judges also get special treatment?
If ~35% of adults don’t pay any income tax, and the top 1% almost 30% it feels too imbalanced.
I went from paying over £100k tax pa to almost nil (fired) – there is logic in keeping the high-earners earning – they are the ones who can move the dial (or stop the dial moving backwards)
All this talk if it being unfair reminds me of the round of beers story in the telegraph
Re: “hellbent on redistributing wealth by …”
and from time to time they just cannot help themselves and let the cat out of the bag, see e.g. from 18 minutes at: https://www.youtube.com/watch?v=VU2IOzJRDyg
This is pure politics. Don’t rule out Labour doubling down and saying that any changes they make to the LTA will be retrospective so that no one (except ‘doctors’) will benefit from the rule changes. This will play well with their core voter base.
One question about the LTA, surely there is a limit if you can only put £60k away each year for say a working life of 30 years… £1.8m.
How do you put more in without it being taxed?
You are assuming the labour solution isn’t as simple as letting doctors choose to fully/partially opt out of building up further NHS pension entitlements and taking additional salary on which they would pay income tax and NI
Wes Streeting is no friend of the BMA
I didn’t know about the judges but if that’s the case then I’m alarmed that the Executive and the Judiciary seem to be such close bedfellows…a healthy democracy would not see them cut deals for each other.
Funnily enough, I too went from circa £100K a year income tax payments, with the corresponding pension reduction taper to being fired. I’m also paying nursery fees and won’t benefit from that change either. I no longer have any income on which to make pension payments so can’t get that tax back and my family doesn’t benefit from any state assistance for daily living. Yet somehow I’m being told ” it’s all so unfair”. Who knew eh?
@James — I don’t blame you for asking that question given the dopey and erroneous press coverage — and its misleading name — but the Lifetime Allowance isn’t about how much you’re *allowed to put into* a pension before you run into penalties.
The Lifetime Allowance is the total value of money you can build up in a pension before you’re hit with a lifetime allowance charge.
In other words, compound interest can take you over the Lifetime Allowance — which is not the end of the world, but which does bring higher tax rates into the picture and investing success is a pretty dumb thing to penalize when you’ve already limited annual contributions, as you note. (Can you guess how well the market will do over the next 20-30 years, as the government seems to think you can? If so we should all be running hedge funds for millions and not bothering with piddly tax shelters…)
Have a read of The Detail Man’s article I link to in my article above for a fairly simple (…) insight into its ridiculous complexity.
As a GP in my 30s I can’t help but feel that long-term these changes are going to have the opposite effect to what the government (apparently) wants. Prior to this budget I’ve only contributed to the NHS pension due to concerns about lifetime allowance breaches in the future and annual allowance breaches. This meant I was saving into a pension pot I could only access at 68/69/70 (whatever the state pension age will be in 30 years!) The removal of these caps opens the door for me to also save into a separate private pension as well which I can access at 58 with all the tax benefits that brings, instead of simply saving my post tax income in an ISA. And hey-ho my pension pot accrues faster and I’ve got something I can access from ages 58-68 while waiting for my NHS pension, allowing me to retire earlier!
Yep, that us exactly my point earlier about defined benefit pensions – they are some of the most inflexible pensions available and using them comes with serious drawbacks few high earners in other fields would accept. All this has done is give higher earners extra options to retire early, which isn’t necessarily wrong – but it isn’t the intention of the policy. Some people may work longer, maybe, but given the FIRE community is generally about ‘retiring’ to do what you want, which may be a different job(!), the policy is questionable. The only valid defence is that drs may work longer in the job they love without punitive tax implications. I can see the punitive tax implications being a drag but have yet to meet a dr that honestly wants to work to their late 60’s. Do I think a wealthy dr with the means to retire at 58 due to now having safe defined contribution pension options alongside the defined benefits pension will choose to work until 68? – no, I don’t. I have no problem with early retirement of anyone and good tax planning to help do it – it is why I visit such blogs! but it does mean we need to seriously question the policy aims.
Glad to see simplification, but Labour annoucing a pledge to roll it back immediately will only hasten those leaving the workforce and leave those who will never hit either the current LTA or be bothered by the limit of tax free withdrawal nonplussed and wondering whether it is all worth it. Both major parties should stop tinkering.
I really don’t understand how progressives are so anti-inheritence. Intergenerational wealth transfer is how to raise idividuals and families into the middle classes. Is it a motivation to bring the wealthy down or bring the poor up? Aspirational working class people are motivated to pass on wealth, inheritance tax is a disincentive to save and invest. Arguing that they should be motivated enough to pay for their own retirement is not enough, the possibility of being able to help out their children increases the likelihood they will save.
People who advocate sugar, tobacco, alcohol and other sin taxes to reduce behaviour they disapprove of are nevertheless surprised that taxing things that they consider beneficial (working, saving) reduces those things too.
There seems to be a lot of comments about whether this LTA change will entice the well-off over fifties back to work. Increasingly I think that debate is a distraction, which was highlighted when I read an editorial in The Spectator that asked the question about the 5.2 million – that’s 5.2 million – people not working due to welfare and disability payments. It seems to me that many of these people are caught up in a totally dysfunctional system that makes it financially insane to pick up a low paid job. So never mind all the debate about “the rich” retiring early – can we have more debate about the welfare system, which hardly one politician, or media analyst, wants to engage on?
Scrapping the LTA system is sensible, but the chancellor has opened the system up to substantial tax avoidance. To claw back residual tax relief he should have introducing the equivalent of the LTA charge on death. A 25% charge if the pension is taken as a survivors pension or 55% if taken as a lump sum. Perhaps 0% for a spouse/dependent unitil they die and 0% if the residual pension is left to charity.
Ah, that famous phrase… “… these people…”. The fact that you’re reading Spectator editorials probably sums up the direction of your thinking on welfare etc. As in, there shouldn’t be any, work till you drop..
The reason progressives are focused on inheritance is because it ultimately creates freeloaders on a society – those who don’t need to work but very much enjoy the fruits of a society that is high tax (for those with higher than average incomes) in terms of the public services it provides. Furthermore, there’s an inherent and unavoidable nepotism that comes along with intergenerational welfare – we all want to do what is best for our children and their children. Society keeps it objective. It’s not about pulling the poor up or bringing the wealthy down, it’s about keeping a relatively stable equilibrium that a society requires to function. Aspirational working class that grew up poor but have now ‘made it’ will tell you the myriad of career or extra curricular advancement opportunities they simply weren’t aware of, weren’t ever available to them where they lived or they simply couldn’t afford (monetarily or opportunity cost) – it’s not an equal opportunities playing field and the already middle class trick themselves into thinking they’ve done it through hard work; Fiona Hill’s (Russian expert not the Theresa May one) book provides good insight on this.
I don’t see any causation or even correlation between inheritance taxes and not saving/working. No inheritance tax should be so high as to cause a middle class to revert to working class so there’s always a benefit to saving for offspring; rather the overwhelming justification in this case is that society shouldn’t give tax incentives (in the form of generous tax reliefs aligned with marginal tax rates – there’s a strong case for flat rate relief for all here but that’s a separate point) to save geared predominantly to the wealthiest that can then be passed by those to their children tax free – welfare for theirs but not for others it would seem. The justification for tax relief on pensions is to save a sufficient amount for one’s retirement, not to create a perpetual inheritance pool. There’s always a GIA.
@ Naeclue – I found this on the one of the big lawyer’s sites
“The taxation of the LTA excess lump sum, serious ill-health lump sum (SIHLS), defined benefits lump sum death benefit (DBLSDB), and uncrystallised funds lump sum death benefit (UFLSDB) will change such that where they are currently subject to a 55% tax charge above the LTA, they will instead be taxed at an individual’s marginal rate”
It is not clear whether the LTA in this context is £1.07m or, if one has already crystallised one’s pot under the FP regime, a different £ threshold. Anyway, I’m not sure this change is quite the IHT dodge some are claiming
@Ruby, taxing lump sums at the marginal rate makes perfect sense if the LTA and charge is abolished. Under the current system there is an option to take benefits as additional income instead of a lump sum charge. The charge is then only 25% and income tax charged on rhe additional income. So 40% taxpayers would effectively be charged 55% (each £100 over the LTA reduced to £75 after the LTA charge, then £45 after 40% income tax). Abolishing the LTA charge would then reduce the tax on the lump sum.
If what the information you have come across is true, there is a subtle change which means that the flat charge has been abolished and the excess pension, if taken as a lump sum would be charged at marginal rates. This option was avaliable anyway as all you had to do was take the excess into drawdown and the very next day draw it all out.
I find it pretty dispiriting that you make this kind of personal attack
My point is that intergenerational wealth transfer is more effective at creating opportunities for the next generation than any other form of. An aspirational working class family that wins the post code lottery when buying their council house in 1987, sends their children to a red brick university and helps them buy a house 10 years later are not freeloaders. Putting barriers in their way to transferring wealth between generations is punitive and regressive.
The old saying about wealth lasting three generations (“one to make it, one to grow it, one to spend it”) is meaningless on a society wide level. Encouraging aspiration, self-sufficiency, prosperity and saving within families leads to better outcomes for the next generation, not freeloaders.
Let’s keep focussing on the LTA please, this is a great thread.
Further speculation about the mindsets of other people risks deletion. Thanks!
Finally, some sense – that’s exactly what should be implemented.
Thinking a bit more on this, it seems obvious to me that a death charge should have been applied to reclaim the up front tax relief, but that of course would have been politically even more difficult than it has already been. It would have also hit the majority of those with DC pensions and SIPPs who were nowhere near the LTA and had intended to pass their pension pots to beneficiaries when they die, along with the up front tax relief. In other words the majority would feel worse off but a very small number better off.
I think it would have been more expedient to stick with the existing mess, but put the LTA back to where it was under the last Labour government – £1.8m, maybe a bit more to take account of inflation.
The parties should really come up with a consensus for pensions as the last thing any of us needs is for pensions to become a political football.
@Ruby, HMRC’s policy paper on Pensions Tax Limits provides the detail regarding changes affecting these other lump sums.
@James, the LTA is not applied to what you put in, which would be sensible, but what your “benefit” is, where “benefit” is calculated in very arcane ways and depends on unknowable investment returns in addition to the amount you put in.
@JP, thanks for that link. Just what I was about to look for.
@TI Apologies. IHT is a trigger issue. I demand a safe space.
@TI Ok, not demand, rather passively agressively request a safe space 😉
Pension pots are deferred income – it always gets taxed at some point. In some ways it’s just deferred taxation as well.
The biggest pension tax break is the arbitrage between deferred income that would have been taxed at 40% (or 60% marginal rate) and pension income that is taxed at 20%.
LTA allowed people basically to hit a pension income that roughly reached the 40% tax band so removing it doesnt change the biggest pension tax break that exists today for a very large number of people.
By removing LTA, the pensioners who directly benefit will broadly be paying tax on withdrawals at >40% (perhaps admittedly deferring tax at 45%) – not a massive giveaway – just the timing has changed, and its hopefully levied on the pot growth, to which the govt has done nothing other than not tax it yet.
Yes it’s less than the 55% charge that would have been levied under LTA – but that was frankly always an odd technocratic measure that actually costs all pension holders even those nowhere near close to it (you dont think pension companies do all that admin for free do you?).
There is no ‘morally optimal’ or ‘morally justifiable’ pension pot size – it’s just the product of personal income, decisions on spending or deferral, time, risk profile of investments used and luck with markets – so nobody left or right can say ‘the right number is £1.235m, or £1.65m or last year’s number plus RPI’ I think thats why Hunt probably kicked some numbers around and said, ‘sod it, just scrap it, thats the proper Tory way of looking at it’ and a whole lot of hassle for a whole lot of people (including HMRC) just disappeared at a stroke. (I believe Lawson similarly eliminated a lot of ‘tax advisors’ at a stroke when he massively simplified income tax and reduced high rates in the 80s). I predict that VCT subscriptions will go down significantly in the next 2 years…….
The first pension raid I can remember was the removal of dividend tax credit for pension funds that hit all the personal pension growth predictions (Gordon Brown – 97?) But generally retrospective hits to pension investors, or pensioners, who can’t really change their income prospects or trajectory are pretty unfair. (Inflation also included in that category!) Labour re-introducing LTA after 2 years of no LTA is going to require even more bureacracy and exceptions than exist already in a pretty flawed system – it might soundbite well for 48 hours, but in the end nobody will really thank you for it and it makes minimal difference to the treasury calculations.
And to those who worry about a separate pension regime for doctors, I’ve always thought professional jump jockeys were on to a good thing being able to draw a pension from age 35………for flat jockeys it was 40. How they determined how many successful jumps made you a jump jockey I never did find out.
@Fremantle — My warning wasn’t directed to you. 🙂 Regarding IHT and the aversion to inheritance of liberals or whatnot, of course if rich parents give their children lots of money then by definition that perpetuates a middle-class. Through another lens it perpetuates a feudal system where who you are born to matters (as much as? more?) than what you do in life.
Beyond some basic level of wealth, to raise people into the middle class I’d rather lean on universal education and higher education accessible without cost being a concern to all that will benefit from it, reducing barriers to entry to various sectors and careers, anti-discriminatory legislation, and targeted government assistance where required (e.g. moving from renting to buying where there is no Bank of Mum and Dad).
With all that said, I can live with small inheritances. Maybe £50,000 or so tax-free per person. That’s already absolutely massive for someone in their 20s compared to people who get nothing, and for whom life is for decades a bank balance that hovers in and out of the red. And this is on top of the massive benefits of being born to well-off parents.
Finally, we have to tax someone. Nobody has ever adequately explained to me why a marginal dollar of tax should come from someone who works for the money, invents something, builds something, or even risks their capital seeking reward — versus somebody who does nothing at all for it, zero, except having the right parents.
For an international perspective, the Australian Labor government has just introduced a cap to pensions of $3 million. Australian superannuation is taxed on the way in(15% on contributions below $27500 pa, 30% above)/taxed on superannuation fund earnings (15%)/tax free out. The cap will increase the tax on super earnings on balances above $3m to 30%.
“Nobody has ever adequately explained to me why a marginal dollar of tax should come from someone who works for the money, invents something, builds something, or even risks their capital seeking reward — versus somebody who does nothing at all for it, zero, except having the right parents.” Let’s have a go at that one again. There are two views of the economic world. A) We are all citizens in a fair state (add your own definition of fair to suit. B) we are members of families and friendship groups who help each other. You view on inheritance depends on what you feel to be your identity. We need a balance between these as the extremes are not great. However, under B) it’s perfectly sensible to get free inheritances.
Interesting discussion, especially with regards to IHT aspects.
From a certain age, folks in the US must drawdown a minimum amount from each qualifying account every year. These are known as Required Minimum Distributions (RMD’s). The annual drawdown percentage is based on remaining life expectancy – ie RMD’s usually increase with age.
This approach ensures uncle Sam gets his taxes and usually sooner rather than later. Just a thought.
Largely agree with you.
A couple of comments/thoughts:
a) Lawson was playing in this arena in 1988, and he may just be the first one that I can recall
b) A lot of the quantifications/costings related to pensions are IMO entirely misleading as they only really quantify the tax deferred and ignore the tax take down-stream when pensions come into payment; I suspect the reasons for this approach are reasonably self-explanatory, but then again I am somewhat cynical
I doubt that we’ll ever agree on this, and although I come across perhaps as an indvidualist, my belief is through both theory of classical liberalism, personal experience and an amateur’s understanding of evidence that the best institute of tackling intergenerational poverty is the family, in any shape or form.
Government and non-government institutions should provide safety nets for society (law and order, welfare, emergency services), but beyong first aid, these institutions have a poor track record of intergenerational change. Even state supplied health services and education rely too heavily on the goodwill of teachers, heads, doctors, nurses and all the other staff and volunteers that keep them running. But it would be hard to argue that these services are succeeding at the moment with some notable exceptions. Education, in particular, starts at home, and it is impossible for school to substitute for a home life that promotes learning and curiousity.
These institutions are certainly capable of great work in stopping individuals falling further, but raising families up is much harder. This is why I am in favour of things like treating households as the taxable unit rather than individuals and also why I am in favour of allowing families to build intergenerational wealth to guard against the vagaries of life. The fact that some wealthy families do not appear to be deserving doesn’t stop the benefit that family friendly aspirational policy does to help those trying to establish intergenerational family stability. IHT is such a policy.
“Nobody has ever adequately explained to me why a marginal dollar of tax should come from someone who works for the money, invents something, builds something, or even risks their capital seeking reward — versus somebody who does nothing at all for it, zero, except having the right parents.”
I agree, but let me give you another case. My niece is married with 3 young children. They have a modest sized house, unfortuneately no life insurance or mortgage protection insurance (don’t ask). My niece’s husband has cancer and his prospects are not good. My niece also has developed health problems which impacts her work. They are struggling at the moment and if the husband dies, they will lose the house. Should that happen, my wife and I have agreed to pay off half their mortgage and her parents the other half. Her parents are not wealthy by the way, with pensions well below the higher rate tax band. Should I not be allowed to help them out because not everyone in their position would have relatives who could help? If you agree I should be allowed to help, how could we legislate for morally deserving and undeserving cases?
The attitude of some to inheritance/gifts seems to be very big brother and not very compassionate to me. If I have earned money, why should I not be free to dispose of that money as I choose, in life and in my Will? I agree that giving people the freedom to give money to whoever they choose is going to throw up morally questionable cases similar to one you described, but I cannot really see a way round it without restricting the right of people to do what they wish with their own money.
If it is any consolation, I know a number of rich kids who would likely be leading happier lives had their parents not showered them so heavily with riches. We took the Warren Buffett approach with ours. Enough so that they could do anything, not enough to do nothing.
Wow, plenty of food for thoughts in comments. My own initial feeling was this was a budget purely for the wealthy with nothing for anyone earning under 6 figures.
But I will acknowledge the LTA should anyway have started being increased at least in line with inflation, as was the intention a few years back.
As should the personal allowance though. That might actually help normal people.
As to the £60,000 pension annual allowance, yes this potentially helps with flexibility regarding making lumpy contributions over time. But in general it will mostly only help people on 6 figure incomes.
The PCLS limit of £268,275 is now a specific and independently set amount rather than a derived/implied amount. This is dangerous. As such not only is there a danger of it staying frozen forever, but also one of reducing it simply in future budgets.
£100,000 sounds a nice round number doesn’t it according to some left leaning think tanks? Yes, let us set it as that from tax year 2025/26 to pay for some emergency or other…well for private sector DC pensions only perhaps.
The impact of an independent PCLS cap on those using UFLPS is a whole minefield in itself as PJH noted. Pension software will need to record even more detail and reporting over decades, and tax calculations will become more complex still.
And to wreck pension planning even further, Labour are going scrap Hunt’s changes anyway and introduce more occupation specific pension tax rules for doctors like they did for judges (sssh! we’re not supposed to talk about that).
As someone said above, the Animal Farm quote is so apt.
Why stop with pension tax rules, why not have different tax rates for anyone who works in the NHS, judiciary, other senior civil servants, MPs, royalty? (we’re already there tbh).
It is an absolute shambles from both main parties. I have no idea who to vote for now.
@Naeclue – great comments as per usual, but I’ve heard the Buffet quote a good few times and my question has always been, ‘so how much is that exactly?’
He he..as it’s Cheltenham week, I the answer to that would be “horses for courses”.
Lot of chatter re the judges pension scheme . Suggest taking a look at:
In summary and IIRC: no AA; no LTA, but this is because there is no tax relief either!
Ive hit gold on this one, possibly unfairly. I was a small business owner that after A day was able to make huge contributions, when the LTA was reduced I took at fixed protection at 1.5M and made no further contributions, the pot has now grown to about 2.2M, it peaked at 2.5M but performance has been poor since Putin started his antics. I was expecting to pay 55% of 0.7M but now I am not, a budget gain of 385K. This bonus alone is many times more than many people manage to save. Is it fair, no its not I have to admit. Nevertheless I am a few months away from 55 and I think I am going to cristalise it before it gets reversed or other conditions applied. In my case it doesnt incentivise me to jump back into the rat race and build a bigger fund. Enough is enough.
Congrats, that’s a nice bonus – isn’t the gain 25% of £700k (£175k), as you’ll still have to pay 40/45% on extraction?
Are you tempted to move to Portugal and get the NHR / D7 visa and withdraw the lot at 10% tax? (I’m tempted, but Uk is low tax anyway for retirees )
All Hint had to do to stop the exodus of senior doctors was to make the NHS DB pension scheme “tax unregistered” like they have already done for judges. This wouldn’t have costed the tax payer money.
If only they had left allowances changing with cpi…….that would have helped many more over the years.
Down with tinkering!
I’m in the fortunate position of having a SIPP with a value around the LTA and fixed protection of £1.25 m .. as I understand it the fixed protection will continue so long as I meet the conditions, one of which is not making any contributions.
The fixed protection comes with a higher tax free lump sum, which I would lose if I were to start making contributions again. On top of that when my state pension kicks in, my marginal income tax rate on drawing from my SIPP is going to be at the higher income tax rate.
Unless I’m missing something it makes no sense for me add anything more to my SIPP?
I was at 92% of the LTA so I was beginning to squint at that. I think the opportunity should have been taken to strike out some of George Osbornes silly cleverness. Scrap the rules about child benefit clawbacks, scrap tapering of allowances, scrap iht relief on residences, increase iht allowance to compensate for latter, reduce annual pension contribution allowance to 30k, reduce sipp contribution limits to 15k.
Then have a think.
But what do I know.
@BeatTheSystem, congratulations, Hunt has been very generous to you and best take advantage while you can. However, I am not sure taking the excess as a lump sum is the best strategy. Fully crystallise for sure, but leave the excess in the SIPP instead of drawing it all and paying Additional rate tax on it. If you did draw it out you would bring cash into an enviroment where you will pay tax on the investment return and land the money in your estate, so potentially subject to IHT. I don’t know what your personal circumstances are, perhaps you intend to immediately spend it all! But if you are going to reinvest, you may as well leave it in the SIPP where the investments can grow free of income and capital gains tax and remain outside IHT.
In the past I have advised people with pensions over the LTA to crystallise up to the LTA, then wait to see if the rules changed in their favour for the rest of the pension. The rules just changed and anyone in that position should probably take the opportunity to crystallise the remainder of their pension before the rules change yet again.
Like you I filled my SIPP after A-Day when the AA was very high and took FP2012. I then fully crystallised just after my 55th birthday at just below my LTA. I have not drawn much since and was on target to pay the LTA charge at 75 on growth. So I too have been given a windfall. Or more likely, my beneficiaries have as I am not expecting to draw much, drawing down from other investments first. Except the Labour party have said they will bring back the LTA, so who knows what the will happen.
@Rhino, I cannot answer for Buffett, but my own interpretation was to provide enough to cover housing costs. My wife and I were fortunate to have been able to buy a house in the 1980s at a fraction of today’s prices and because of the relatively high incomes we had, to pay off the mortgage very early. That gave us a huge sense of freedom. Not freedom to do nothing (not FI), but the freedom to make risky career decisions.
Re “In the past I have ….”
Agree entirely for a DC pension.
As I understand things the situation is somewhat different for most DB schemes. In a DB scheme the LTA is usually calculated as a multiple of the pension payable (at the point that it is claimed) plus any tax free lump sum (PCLS) taken. So generally drawing earlier than the DB schemes normal retirement age (NRA) reduces the LTA. Also, I do not know of any DB scheme that allows partial/staged retirement – ie you start you DB scheme once and only once. So if you wanted to purely maximise things (aka top out the LTA) you may have to actually wait. And, some DB schemes pensions are higher if you delay retirement beyond NRA – but not all schemes do this.
@Al Cam, I have been trying to think through the repercussions of the changes and Labour’s threat to reintroduce the LTA. It is hard enough already and I had not given DB pensions a thought!
Assuming the LTA is gone before the next Labour government come in, how will they handle the reintroduction of the LTA? I have Fixed Protection. Would that be reinstated? When the LTA was first introduced on A-Day, Enhanced Protection was offered, which allowed some to opt out of the LTA. Would it be offered again on the same basis (no more contributions)? That would be ideal for many of us.
For those with DC pensions already over the LTA, it would seem sensible to crystallise as soon as the LTA charge goes to zero, assuming the age requirement has been met.
Maybe that is sensible for those still contributing, but likely to get near the LTA as well? Not sure though as it might be better to wait until the LTA is abolished completely. That way none of the LTA will have been used up, unless Labour do something very complicated with crystallisations that happen before they reintroduce the LTA.
For my wife and I, already crystallised, in drawdown, but likely to exceed the LTA under the age 75 BCE, I don’t think there is much we can do at present and will just have to wait and see what happens.
Thanks for your thoughts.
I had/have both a DC and a deferred DB scheme.
Just as soon as I could, I fully crystalised my DC. This was some years back.
My overall LTA position would therefore largely depend (or maybe not after Hunt) on when I start my DB. My plan for when to start the DB has evolved as the [I suspect, not yet finished] LTA saga has played out. When I crystalised my DC I could have left my DB until my schemes NRA without any major LTA issues, however this has since come back a good few years, and my thinking on other related matters has also evolved. Essentially, I have slowly moved from a maximise perspective to an enough view and the last few years has given me a far better feel for what ‘enough’ might just be for us.
As it happens, I was right in the middle of completing the papers to start my DB early in the 23/24 tax year and thought I would just wait and see what, if anything, the budget brought. I have not seen anything yet to change my latest plan. But, I just have a nagging doubt that I may have missed something in the weeds. Fortunately, I do still have some time to mull things over.
Naeclue, I’m only a layman but as I read it the Fixed Protection is still in place because it entitles the fixer to a higher PCLS than the new 268k cap. Providers will still have to track this and I suspect, in the absence of an alternative, the existing BCE structure will be used minus the LTA charge even though there is no longer any need to make a crystallised/non-crystallised distinction for LTA purposes after 6/4. I suspect, but don’t know, that those who have crystallised to 100% of LTA will still need to move finds previously designated as non-crystallised into drawdown but it could happen automatically. But this is guesswork until we know more.
For those people with pension funds above their LTA, or remaining LTA if they have partially (or fully) crystallised, it does seem like a good strategy to fully crystallise the entire fund, take the PCLS and move the entire fund into drawdown in 23/24. This would previously have attracted a 25% LTA charge on the value of the fund above their remaining LTA, but in the 23/24 tax year that charge will now be 0%. As I understand it, until the LTA is abolished (in April 2024) pension companies will still be required to calculate the LTA used and ‘apply the charge’ even though that charge will be 0%, which is a quick way of implementing the change as it requires minimum update to existing systems, plus it ensures that PCLS values can continue to be tracked (25% of someone’s LTA) until another method can be devised to do keep a track of PCLS usage.
These arrangements do beg the question of whether it will be better for those over the LTA, to fully crystallise their entire fund in 23/24, or wait until the LTA is abolished. If a subsequent Government reintroduce the LTA, will it be better to have used up 100% of your LTA in 23/24 and had your fund crystallisation and ‘payment’ of the 0% LTA formally recorded by your pension provider. If it is re-introduced will you be able to say “I’ve paid it – just because you didn’t like the 0% rate at the time, you can’t ask me to pay it again” – after it’s abolished, no such record may exist.
Hopefully further details will be released over the coming weeks that will help to clarify the optimum strategy.
Two and a half working weeks to the end of the tax year and it is not clear what the new rules are. Is this really what “steadying the ship” means in 2023?
Ian sitting on a SIPP over the LTA and am in drawdown. I am thinking along the same lines as “nearly there” at 131.
Crystallise any arrangement not yet crystallised and take the PCLS upto the max. In FY23/24.
I had thought that drawdown up to the 40% income tax limit was the right thing because of the test at 75. But if that is gone then it’s a different balance between income tax and inheritance tax. Needs a careful look and a spreadsheet.
I listened to Steve Webb the ex pensions minister on ThisIsMoney. He said it would be unthinkable for a new government to reverse the LTA and provide no protection for people that have planned on the basis that there is no LTA. Hmm.
@Barn Owl, let’s hope Steve Webb is right. Some people will have difficult decisions to make. If they are under the LTA, but have stopped paying in, should they start paying in again? If they have stopped paying in, but have taken fixed protection, should they start paying in again, even if that means throwing away a higher PCLS?
Re: ” … even if that means throwing away a higher PCLS”
I was at 97% LTA when I turned 55 last week, and was contemplating an aggressive drawdown policy to keep under the age 75 test. So LTA removal is good for me, but the threat of its reintroduction leaves a right mess.
Do I crystalise the lot in 23/24, but still have a BCE recorded that could be held against me if LTA returns under the same terms. Or do I do it in 24/25, when in theory the whole edifice is dismantled, and my pension provider won’t record any BCE. Or 25/26 after Labour get in (as I hope), but before their complicated reintroduction legislation that tries to handle a record gap becomes law.
One thing is clear, the Lump Sum restriction means you might as well get it all early once your pot gets to £1.073m. Subsequent growth will be taxed at 8.75 or 10% depending on dividend/CG split, but left in it will be taxed more likely at 40% than 20%.