Budget 2023: Chancellor’s box of tricks makes LTA disappear

As reported on March 14, the chancellor also increased the money purchase annual allowance from £4,000 to £10,000. 

This limit was seen as an obstacle for many – often higher-paid – individuals from returning to the workplace, as they might easily breach the limit on contributions and face tax liability. 

The annual allowance was also increased by half (50 per cent) from £40,000 to £60,000.

For my next trick

But the real “rabbit from a hat” moment came in the Chancellor’s announcement on the lifetime allowance. While everyone anticipated an increase to £1.8mn from just under £1.1mn, Hunt announced that it was to be scrapped altogether.

Increasing the annual allowance and abolishing the LTA altogether will be welcome news for many healthcare workers who have been forced to reduce their hours or retire early

Graham Crossley, Quilter

“Increasing the annual allowance and abolishing the LTA altogether will be welcome news for many healthcare workers who have been forced to reduce their hours or retire early,” said Graham Crossley, NHS pensions expert at Quilter.

“Our own analysis of [HM Revenue & Customs] data and freedom of information data revealed how much of a thorny issue the current annual allowance is for the NHS. We found that at least 34 per cent of all people who exceeded the annual allowance in 2019-20 were members of the NHS Pension Scheme.

“The changes to the annual allowance and the abolition of the LTA tie in nicely with some of the changes already tabled in relation to the NHS Pension Scheme, and will see many lifted out of eye-watering annual allowance charges and no longer have to worry about the LTA at all.”

While the removal of the LTA will be widely – and warmly – welcomed, there is important work to be done to ensure all employees will benefit, said Gavin Ellison, partner at law firm Womble Bond Dickinson. 

“For sponsoring employers and trustees of pension schemes there are a number of implications to work through, including ensuring that pension scheme rules reflect the revised tax landscape and assessing the impact of the changes on any cash alternative arrangements in place for individuals with various forms of LTA protections.”    

Pension tax changes indicate route to simplicity? 

Sackers partner Claire Carey said: “Sweeping away the LTA has a number of knock-on consequences which will need to be worked through, and the devil will lie in the detail of the ultimate legislation. 

“But, given the relative frequency with which the LTA has shifted previously and the complexity of the accompanying protection measures, its removal suggests a significant step towards greater pension tax simplicity.”

National Pension Trust head Paul Armitage is concerned that “the constant chopping and changing of the pension rules just leads to complexity and confusion”. 

“We need a cross-party consensus that puts pensions saving – and in particular tax relief – on a long-term footing,” he said.

“If this gets reversed early in the next parliament, then these changes will have been pointless and arguably would have done more harm than good.”

The focus is in the wrong area  

Railpen chief executive John Chilman welcomed the changes to the LTA and the annual allowance, but said that more should be done to support lower earners and those under-represented in pension savings, to contribute to a pension and improve future financial security. 

“Research by the [Pensions and Lifetime Savings Association] found that over 50 per cent of the population will fail to meet the retirement income targets set by the 2005 Pensions Commission, and this increases to 62 per cent of those saving into a defined contribution pension,” he said. 

Phil Brown, director of policy at People’s Partnership, provider of The People’s Pension to 6mn people across the UK, welcomed the impact the changes would have on NHS workers, but echoed Chilman’s comments that it does nothing to counter under-saving in the UK. 

“These changes to the pension allowances won’t impact the vast majority of hard-working savers and means very little to the millions of people who save through automatic enrolment,” Brown said. 

“Reform to workplace saving will be the only way to ensure that millions more people can save enough to live on in retirement.

“The chancellor’s reforms on childcare are a positive step towards narrowing the stark gender pensions gap, which currently sees the average woman around £7,500 a year worse off in retirement than a man the same age.”

Much to be thankful for

Aegon pensions director Steven Cameron said: “Removing the LTA will cut out a swathe of complex pension tax rules. It will allow individuals who have stopped contributing for fear of exceeding it to consider restarting contributions. 

“It may also, subject to any detailed provisions, allow people who have already started taking benefits to top these up.”

Cameron said the limitations placed on the tax-free cash being limited to 25 per cent of the old LTA of £1,073,100, or £268,275, was “not surprising”, as to allow a quarter of an unlimited pension pot tax-free would have been “excessively generous”.

“The cap on the tax-free lump sum is a logical solution to the competing demands of getting high earners and doctors in particular back to work, without giving away too much in tax breaks,” said Tom McPhail, director of public affairs at the Lang Cat. 

“High earners’ pension incomes will likely be taxed at 40 per cent, so by limiting the tax-free lump sum, the chancellor has removed the barrier to work without writing a blank cheque for wealthy savers.” 

There was more on offer, too, in the shape of the retention of the carry forward rules, which allow unused tax relief from the three previous years to be made up at a later date. 

“This means in the 2023-24 tax year, as well as the £60,000 allowance for that year, some people may have some unused annual allowance from the past three years of up to £40,000 as well,” McPhail said. 

“So for someone who hasn’t made contributions in previous tax years, but who was a member of a pension scheme, this could allow up to £180,000 to be paid in next tax year.”

The cap on the tax-free lump sum is a logical solution to the competing demands of getting high earners and doctors in particular back to work, without giving away too much in tax breaks

Tom McPhail, the Lang Cat

Quilter head of retirement policy Jon Greer called Hunt’s Budget “the biggest U-turn on pension tax policy in a decade” and welcomed the changes, as it may encourage many who had stopped contributing for fear of breaching the LTA to restart their savings.

“This is a seismic shift in policy to the benefit of higher earners. One wonders how long such generosity will last for as we’d expect a significant uptick in the amount being funded into pensions by those with higher earnings,” he said

The LTA abolition is set to cost the government around £2.7bn over the next five years, providing high earners an opportunity to contribute into their pensions, Greer added.

There’s a limit to change…

The cap on tax-free cash was not the only mildly sour note for higher earners. The annual allowance taper was also retained for those with income including pension contributions of more than £260,000 (currently £240,000). Keeping the taper does not necessarily fit with the Hunt’s claims of encouraging people back into work.

“It is a complex way of restricting relief for the very highly paid and is inflexible for those in defined benefit schemes who typically have less control over the amount deemed to have been added to their pension each year,” Greer said.

“Therefore, it still provides a disincentive for them to work more and signals to them that normal pension provision is not designed for them.”