Lifetime allowance: Confusion and a 'cruel twist' follow its abolition

HMRC pension data has revealed that pension withdrawals soared in the first six months of 2023 with 1.1 million people withdrawing £7.5bn from their pensions.

The increase meant there was a 17 per cent in the number of withdrawals since 2022, and a 67 per cent rise since the same period in 2020.

Interactive investor pointed out that pension contributions were up £200,000m with £11.9bn contributions during the year ending 2022, up from £11.7bn the previous year, while 7.5 million people paid into private pension, up from 7 million.

There were more contributions by the self-employed - £2.3bn contributions were made by self-employed members, up from £2bn the previous year.

Pension tax relief cost £69bn up from £67bn with hgigher rate taxpayers receiving the lion’s share, 40 per cent of pension tax relief is for basic rate taxpayers while 54 per ent is paid to higher rate taxpayers and 6 oer cent at the additional rate.

Lifetime allowance charges hit £497m compared to £391m and the total value of charges reported by schemes for tax year 2021 to 2022 was £335m, this increased from £202 million reported for 2020 to 2021.

'Cruel twist'

Alice Guy, head of pensions and savings, interactive investor says,“It’s extremely worrying that so many more people are withdrawing funds from their pensions and at higher rates. Pension savings take years of dedication and hard work to build and it’s a huge concern that so many are having to dip into these savings, at potentially unsustainable rates.

“The raising of the state pension age means people often have a gap between winding down in the workplace, perhaps going part time, and receiving the state pension. We sadly see that many people in their mid-sixties are struggling to make ends meet before they receive the state pension at 67. This means that many older workers are facing a huge dilemma, often needing to focus on immediate needs over long term financial goals.

"In a cruel twist, lifetime allowance charges soared last tax year, just before the charges were abolished this April. The rules changes were a complete surprise and many wealthy pensioners will be absolutely gutted to have triggered a 55 per cent penalty, just months before the rules changed.

"Likewise, annual allowance charges were at a record high last tax year, just before the allowance was raised from £40,000 to £60,000 and there will be many disappointed pension savers who triggered a tax charge just before the rules changed.”

Advisers confusion over LTA keeping Royal London's technical team busy

Royal London, one of the UK’s largest life, pensions and investment mutuals said confusion over the lifetime allowance (LTA) had generates the most questions from advisers since its abolition was announced in the spring budget.

Royal London said it had delivered  over 70 training sessions to adviser firms either face-to-face or via webinar since draft legislation was announced.

Clare Moffat, pensions expert at Royal London, said: “Our conversations have highlighted that, by far, advisers and their clients are more concerned about the uncertainty surrounding the lifetime allowance changes earlier this year than any other matter.

"Although we have some draft legislation, we are still waiting on more in relation to key areas of the removal of lifetime allowance. It's difficult for advisers to advise clients when the full information isn't available.

“With the upcoming Autumn Statement, more advisers are getting in touch as there is concern there will be more changes ahead. Clients who were previously restricted by the annual allowance may be thinking about paying an extra £20,000 a year into their pension, but uncertainty around the rules is seeing this being delayed. Advisers are seeking clarity, and this is needed quickly to enable effective planning for clients.

"Pensions freedoms had a huge effect on choices at retirement. However, the changes to lifetime allowance will have an equal, if not greater, impact on the way pensions work.”