It’s not that often pensions make headline news. However, in last month’s Budget announcement the Chancellor Jeremy Hunt unveiled significant changes that impact higher earners and those with larger pension funds.
The lifetime allowance (LTA), which is the cap on lifetime pension savings of £1.0731 million, is being abolished; this means no lifetime allowance tax charge is payable from 6 April 2023. Tax free cash is being held at the current amount of £268,275. At the same time, the annual limit for everyone saving into a pension is increasing from £40,000 to £60,000 and the tapered annual allowance for high earners will increase with a more generous formula.
How does this affect our DB advice?
The lifetime allowance has been a key element of DB advice over recent years. This was primarily driven by the different way DB benefits are tested against the LTA compared with DC pensions; it meant that a transfer for flexibility could create, or exacerbate, a client’s LTA tax charge. This became an even more prominent aspect of planning when CETV multiples were driven to record highs by low gilt yields.
We have also had to deal with many complex issues created as a result of the continual tinkering with the LTA regulations – ensuring we didn’t breach appropriate limits for those with enhanced protection, whether enhanced transfer values would rescind fixed protection – if the changes go ahead as presented, then this complexity will hopefully all be consigned to the past.
For Pension Increase Exchange (PIE) projects, the removal of the LTA makes things a bit simpler. There is no longer a need to consider whether taking benefits will trigger a BCE3, or looking to structure offers to benefit from a ‘rule of 20’ exemption. In reality, the LTA was very rarely a key aspect of a client’s decision whether to take a PIE offer.
What happens next?
At the time of writing, we have not seen the Spring Finance Bill. Our understanding is the current LTA calculation regime will remain in place, with excess funds facing a charge of 0% when drawn as income or entering flexi access drawdown. The current expectation is that a future Finance Act will remove the LTA altogether.
However, the Labour stance has been that they would immediately re-introduce the LTA if they come into power. With an election expected to take place in the second half of 2024, this creates a huge amount of uncertainty for savers. Without being able to predict whether their will be a LTA when they come to draw benefits, and what the threshold will be, will make it hard for some to make sensible decisions about how much to save for the future.
We are already proactively contacting clients we have advised who we believe are close to the limits, to ensure they are aware of the changes and helping on any decisions they need to make now.
This uncertainty does, we imagine, present a headache for pension scheme administrators; the LTA is woven into the fabric of how benefits are drawn, so unpicking this only to have it immediately re-introduced must feel like a potential waste of time.
Finally, another headache presents for large employers; what do they do for their employees who have opted out of pension saving due to LTA concerns? Do they look to allow them to rejoin schemes, only for them to opt out again next year?
While we look forward to some clarity, it feels like the LTA is currently a political football that might be kicked back and forth a few more times before we reach a conclusion.
CA9305 Exp 03/24.
