UK Chancellor abolishes lifetime allowance for pensions savings (LTA) in surprise move

UK Chancellor Jeremy Hunt has announced in his Spring Budget statement that he is to abolish the Lifetime Pension Allowance altogether, rather than rise the limit as widely speculated.

The annual allowance rises as predicted to £60,000 from £40,000.

The move comes in a bid to tackle fears that the current allowances were compelling many professionals, particularly doctors, to retire in their fifties, an issue it said has become more acute since the government announced a six-year freeze on the annual and lifetime allowances in 2020.

The LTA was originally set at £1.5m when it was introduced on A-Day in 2006. It gradually rose to £1.8m in 2010 but fell to just £1m in 2016. Upratings since then have seen the LTA grow to £1.073m.

The AA was originally set at £215,000 in 2006, rising to £255,000 in the 2010/11 tax year before being cut back. The MPAA was introduced in April 2015 at £10,000 before being cut to £4,000 from the 2017/18 tax year.

The money purchase annual allowance (MPAA), which affects those who flexibly access their retirement pot, will also rise from £4,000 to £10,000.

The tapered annual allowance, which affects very high earners, will also rise from £4,000 to £10,000.

In addition, the ‘adjusted income' threshold used to determine when the taper kicks in will increase by £20,000, from £240,000 to £260,000.

The maximum tax-free cash someone can take will be frozen at the current level of £268,275, in other words capped at 25% of the current LTA of £1,073,100.

Combined, this will cost the government £4bn over the next five years.

In early reaction, Graham Crossley, NHS pension expert at Quilter, said: "Increasing the Annual Allowance and abolishing the lifetime allowance altogether will be welcome news for many healthcare workers who have been forced to reduce their hours or retire early. 

"Our own analysis of HMRC 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% of all people who exceeded the Annual Allowance (AA) in 2019/2020 were members of the NHS pension scheme. 

"These figures illustrate how badly medical professionals are targeted by Annual Allowance tax rules compared to other professions and it is commendable that there has been some positive movement in this area.

"The NHS has played a critical role for the nation over the past few years during the pandemic and its only right that the government changed these unfair rules and eased its significant retention problems and stem the flow of doctors leaving the NHS in their droves and actively encourages those who retired to return and those who reduced their hours to take on more work.

"The changes to 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."

Les Cameron, head of technical at M&G Wealth, said: "The abolition of the Lifetime Allowance was an unexpected but welcome announcement.

"What we need to know now is the detail of how this will be implemented as the Lifetime Allowance limit is referenced in many different areas of pension legislation affecting amongst other things the amount of PCLS that can be paid. 

"Thinking more widely, this should see a reduction in attractiveness of other tax-incentivised vehicles, such as venture capital schemes, which were the natural go-to places for those who'd had their pension funding limited by the Lifetime Allowance."

Cameron added: "The increase to the annual allowance limits will clearly be welcomed by those who have been most impacted, predominately those on higher incomes and in defined benefit pension schemes. It also gives additional scope for those with defined contributions schemes to make increased contributions.

"With the Corporation Tax change rumours unfounded, this increase will be particularly welcomed by SME business owners with the potential for higher rates of corporation tax relief next year. 

"In terms of impact the increase from £40,000 to £60,000 means that in 2023/24 a member of a defined benefit scheme can see their pension increase by £3,750 instead of £2,500 before breaching the allowance. A tax saving of £8,000 for higher rate taxpayers."

DeVere Group CEO Nigel Green said: "We welcome the scrapping of the LTA, which discouraged individuals to save for retirement.

"This development serves as an incentive to save as much as possible for retirement, as well as encouraging older people to return to the workforce, thereby boosting Britain's chances of long-term economic prosperity.

"It also highlights that retirement finances are increasingly a personal responsibility.

"It's becoming clearer that the government won't be able to support and provide for its citizens as it has done for generations before due to an ageing population and shrinking workforce; weaker economic growth; rising living, health and care costs; less generous company pensions if they exist at all; and the fact we're living longer, meaning that accumulated funds need to go further.

"As such, moves to encourage personal saving, such as abolishing the LTA, must be championed."

David Brooks, head of policy at independent consultancy Broadstone, said: "Abolishing the Lifetime Allowance and increasing the Annual Allowance is a huge tax giveaway to wealthiest people in the country.

"Combined with the increase to the MPAA it totals a package that will cost the country over £4 billion through the next five years. £2.75 billion for the LTA abolition, £1.1 billion for the Annual Allowance and £170m from the increase to the MPAA.

"The Annual Allowance increase again provides a tax bonus for higher earners but is likely to work against the Chancellor's aims to create a ‘back to work' budget. That is because those able to pile an extra £20k of cash every year into their pension will build their retirement treasure trove far faster and may well be in a position to retire earlier as a result.

 "It is hard to escape the view that this package of measures is a political move than seriously, considered pension policy. It is overwhelmingly weighted in favour of the richest who will benefit from significant increases to saving potential. Given the UK already faces a pensions adequacy crisis, it is difficult to see how these giveaways are well-targeted to ensure the nation is in the best possible position to achieve positive retirement outcomes."

Stephen Lowe, group communications director at retirement specialist Just Group, said: "For ‘Middle Britain' the abolition of the Lifetime Allowance and the additional Annual Allowance will make little difference.

"For very high earners the extra Annual Allowance will be useful and it may also help those later in life who find they need to save significantly extra to bolster their pension pot ahead of retirement. Higher earners will also benefit from the increase in the Tapered Annual Allowance and the earnings threshold that triggers it. 

"The removal of the lifetime allowance releases people to save as much as they like but for many it will be irrelevant, as the Chancellor himself indicated the obvious winners are doctors in the defined benefit NHS pension scheme. 

"The Money Purchase Annual Allowance does have clear benefit for many in ‘Middle Britain'. Anyone who's taken a flexible payment from their pension, perhaps to carry them or their family through the cost of living crisis, now has more headroom to boost their pension savings and clears them from the tax tangle that the previous low allowance created. 

"The freezing indefinitely of the Pension Commencement Lump Sum - tax free cash - at £268,275 may suggest the Chancellor has plans up his sleeve to recoup over time some of the generosity he's shown in today's Budget.

"The government's mid-life MOT isn't a new idea - and public use of the excellent government guidance service Pension Wise that already exists is very low. There's a real risk this will be a policy that gathers dust on a shelf and never helps people in the real world. The government will have to show some leg on how it's going to make sure people actually benefit from this service, and that the financial aspect is given the necessary weight."

Alan Godbeer, sales director at WBR Group, said: "It came out of left field the announcement of removing the Lifetime Allowance (LTA) altogether which is stupendous.  

"The AA increase and abolition of the LTA has made pensions more attractive, including an under used pension scheme called a DBSSAS.  This is because the way in which a defined benefit pension is tested is different to a defined contribution scheme.  A defined contribution scheme is tested on the monetary value of the fund, whereas a defined benefit scheme is valued on the pension benefits that are accrued.

"This is all good news for advisers and their SME Director clients who are attracted by the idea of their company being able to fund retirement benefits on their behalf, and to build lifetime retirement wealth, way in excess of what normal money purchase limits would allow without penalty.

"As an employer contribution for a Director or key employee, it is usually possible for the entire amount to be offset against company profit in the accounting period in which the contribution is made, thereby obtaining relief from Corporation Tax.  

"As with any SSAS, the money once invested can be self-invested in a wide range of investments including the commercial property the company trades from, a secured loan to help support the running of the client's business and a wide range of financial investment vehicles."

Godbeer also set out a small case study to illustrate the new allowances:

A male director who is due to reach age 55 before April 2028, the DBSSAS multiple is 3.27x for a contribution after 6 April this year, or £196,200 if the AA is increased to £60,000.  That's £65,400 more than before and he will get 31.5% more Corporation Tax relief now it has increased from 19% to 25%.  That's £49,050 in Corporation Tax relief, £16,350 more than before.  The Company can also contribute at this level regularly now that the LTA has been abolished with no limit restrictions on behalf of the director.

Tom Selby, head of retirement policy at AJ Bell, said: "Jeremy Hunt has unveiled a pensions tax-cutting bonanza far beyond anyone's pre-Budget expectations and the most significant retirement policy intervention since the 2015 ‘pension freedoms'.

"The lifetime allowance has long acted as a drag anchor on strong investment performance and a deterrent to retirement saving, while also creating horrendous complexity in the system. It has also added to the huge turmoil engulfing the NHS, with senior doctors choosing early retirement over paying a pension tax penalty.

"Significant hikes in the annual allowance, and in particular the money purchase annual allowance, are also welcome and should help reduce disincentives for over 55s to return to the workforce. 

"Taken together, these pension tax cutting measures amount to a colossal boost to savers and retirees and send a clear message to hard-working savers that the government is now firmly on your side."