So where the paying spouse may have previously been reluctant to share their pension because of the impact it would have on their LTA, Ingram says the removal of the LTA may encourage more pension sharing orders.
LTA abolished: an inheritance tax loophole?
While the tapered annual allowance may still deter HNW individuals in particular from saving significantly more into their pension, Tom Minnikin, partner at Forbes Dawson, a tax consultancy, says he expects to see more HNW individuals using pension funds as a vehicle for inheritance tax planning.
“This trend is likely to be most prevalent amongst wealthy families who are adequately provided for via other means,” he says. “The ability to now accumulate uncapped value within a pension fund with no income tax payable until benefits are taken, plus a shelter from IHT, is extremely attractive.”
Individuals may have also been advised to start drawing income from their pension because of concerns around the LTA, but Minnikin says they may now decide to continue accumulating value for as long as possible. “Hence, the pension fund may become the ‘savings pot of last resort’,” he adds.
Could the abolished LTA actually generate more income tax?
Savers will no longer be subject to a maximum tax rate of 55 per cent for exceeding the LTA, but they could still pay income tax on their pension. Death benefits are also subject to their beneficiary’s marginal rate of income tax if they die aged 75 or over.
If the LTA being abolished leads to increased saving into pensions, this could lead to greater income tax receipts over time, says Minnikin. But he adds that if the LTA being removed causes individuals to leave their funds untouched for longer, then the amount of income tax receipts could go down.
“Furthermore, if it encourages individuals who would otherwise not have contributed to their pensions – say, because they were in fear of reaching the limits – to contribute more, then this could have a double-whammy effect, as personal contributions enjoy income tax relief,” Minnikin says.
Although the abolishment of the LTA could have an impact on estate planning, Ian Dickinson, a director at chartered accountants UHY Hacker Young, says the policy change lacks clarity for the 'big picture’ and long-term planning.
“The nature of pension legislation means that most people cannot rely on these changes to still be in place when they retire, meaning that this change only impacts a very small part of the population,” he adds.
Chloe Cheung is a senior features writer at FTAdviser
