In this year’s spring Budget chancellor Jeremy Hunt announced a raft of changes to the pension tax programme that are set to have far-reaching implications.
So who will the changes affect and will they succeed in keeping people in work for longer?
The tax changes will affect a number of different groups. Firstly, those with pension pots approaching or breaching the lifetime allowance, or those who would likely be affected in the future, upon drawing benefits or the age 75 test.
In his announcement, the chancellor said the LTA charge would be removed from April 2023 before the allowance is abolished entirely from April 2024.
It is currently capped at £1.073mn. Under current rules, if a person breaches the LTA a charge will be applied to the excess – 55 per cent for benefits taken as a lump sum and 25 per cent if taken any other way, such as income drawdown, uncrystallised funds pension lump sum or annuity purchase.
As Harry Bell, director of financial planning at Charles Stanley, explains, many individuals who have previous protections, when lifetime allowances were introduced or adjusted, will have stopped paying into their pensions in order not to lose these valuable protections.
The types of individuals in scope under the LTA abolition include higher earners such as doctors, senior executives and business owners.
According to Scott Gallacher, director at Rowley Turton, the changes may also benefit the families of higher earners with large death-in-service benefits who die.
This is because death-in-service benefits are often written under pension legislation and therefore subject to the LTA.
Secondly, those who have previously been restricted to tax relief on a gross contribution of £40,000, called the annual allowance, will now be able to contribute up to £60,000 gross.
The annual allowance limits the total amount a person can contribute to a pension in one year without paying a tax charge.
This covers personal contributions, employer contributions and tax relief.
Alice Shaw, wealth planner at Succession Wealth, says the AA increase will allow business owners to potentially increase contributions for directors and employees, providing it meets HMRC’s "wholly and exclusively" test.
It will also allow those individuals with surplus funds to make larger personal contributions subject to them having the sufficient relevant earnings to qualify the contribution.
As Shaw explains further, the third set of people affected by the changes are higher earners, who will be positively impacted by the increased tapered annual allowance. This is where the annual allowance is reduced based on higher earnings.
The current annual allowance starts to be tapered £1 for every £2 over £240,000 until it reaches just £4,000. The tapering will now start at £260,000 and will be capped at £10,000.
