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!
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