The abolition of the UK's lifetime allowance for pension savings (LTA) could ‘remove a burden' for HM Revenue & Customs (HMRC), will have ‘knock-on' consequences and may see some "rowing back" as the structure is dismantled, pension lawyers say.

Arc Pensions Law managing partner Rosalind Connor (pictured) explained that while the chancellor announced the abolition of the LTA in his budget, in practice he was getting rid of any LTA charges - the tax from exceeding the LTA - from 6 April, but taking longer to work out what to do with the "complex framework" of the LTA.

She said this could lead to "some rowing back in the future as the structure is dismantled".

Connor also questioned the reason given by government for abolishing the LTA - that it would help avoid people giving up work because of the LTA charge.

She said this "seemed unlikely" as the charge only arises when a pension is paid, and there were plenty of arrangements that people can put in place to avoid accessing sufficient of their savings to hit the charge - adding the reality could be that the LTA had outlived its usefulness.

Connor said: "It is only speculation, but it might be possible that the LTA charge has become unattractive for HMRC and the Treasury. Probably, the majority of people who reach their LTA are well enough advised to make use of the various methods to prevent a charge becoming due."

She added: "The administrative burdens of providing the protections may be quite significant on HMRC, and if the LTA charge is not bringing in much revenue, it may well make sense to remove the burden and the charge simultaneously."

Knock-on consequences

Sackers partner Claire Carey said that, given the relative frequency with which the LTA has shifted previously and the complexity of the accompanying protection measures, its removal suggested "an unexpectedly large step towards a simpler pensions tax system" but she said its removal could have other impacts.

She 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."

Eversheds Sutherland partner Emma King agreed the abolition of the government's LTA measures would "help to simplify some of the many layers of the pensions information onion" but said key questions remain.

She asked: "Will those who have already registered with HMRC for LTA tax protections and agreed to limit future benefit accrual on that basis now be free to save more into pensions? This could ease of some of the difficulties around bulk transfers and guaranteed minimum pension conversion involving members with certain LTA protections."

Travers Smith pensions partner Susie Daykin agreed that abolishing the LTA could make redundant the existing tax protections that have been made available to individuals as LTA thresholds reduced. 

She said: "This will helpfully sweep away what is an extremely complex set of tax rules governing when such protections apply and can be lost. As a result, both schemes and individuals will no longer need to worry about certain actions that were previously restricted because of the risk of impacting those protections. For example, schemes may have more flexibility in relation to equalising for GMP inequalities though the use of the conversion legislation."

The impact on trustees and sponsors

Womble Bond Dickinson partner Gavin Ellison said there were a number of implications to work through for sponsoring employers and the trustees of pension schemes.

He said these included 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.

Keystone Law pensions solicitor Monica Ma said many employers in the private sector have been dealing with the LTA issue by offering their senior, high-earning employees cash payments instead of pension contributions. 

She said: "These arrangements will now need to be reviewed as it may be in the interest of both the employer and the employees to revert to tax-advantaged pension contributions."

Pinsent Masons pensions partner Stephen Scholefield agreed the budget makes pensions saving more attractive for high earners - adding that increasing the annual allowance to £60,000 and abolishing the LTA means that most people will no longer need to worry about the "hideous complexity" of the pensions tax rules.

He said: "It also removes an administrative headache for those who run pension schemes, which did little to aid the public's understanding of pensions."

Scholefield also believed employees may now look to come back into company schemes. He said: "Employers should expect to see some of those who opted out of pension schemes for tax reasons now press to be re-admitted."

In a note to clients, CMS partners Keith Webster and Pete Coyne said many in the pensions industry would welcome yesterday's decision, given the complexities that arise from the various transitional LTA protections and the issues these can cause (for example, on transfers, or GMP conversion).

They said: "It will be important to consider the position of any members who might take action to crystallise benefits between now and 6 April, in order that they do not unnecessarily expose themselves to an LTA charge.

"In any event, schemes should review and update their wider communication materials. Employers may also wish to revisit any arrangements they have in place, particularly for high earners, to mitigate the impact of the current restrictions. Employers that currently exclude members with LTA protections from being automatically enrolled (or re-enrolled) could now also reconsider their approach."