The increase in the annual allowance (the amount you can put into your pension in any one year) from £40,000 to £60,000 had been widely signalled prior to the Budget, but Jeremy Hunt pulled a rabbit out of the hat by abolishing altogether the lifetime allowance, which stood at just over £1.07 million.
The pension reforms will inevitably be welcomed by senior public sector workers, especially NHS consultants and doctors, as the pension tax charges have been discouraging them from continuing in their roles at the very time there is a healthcare skills shortage and long waiting lists. The BMA had lobbied hard for this change, and welcomed the announcement; it will help others in the public sector, such as education leaders, as well.
The increase in the annual allowance will also benefit those in the decade or so before retirement who may be wanting to boost their pension pot, perhaps because they were unable to contribute much early on in their career. It will give them the chance to play catch-up without incurring huge tax penalties.
There was one other important change which the Chancellor didn’t mention in his speech. Prior to the Budget, those who had opted for early retirement and flexibly drawn benefits from their pension pots were limited to annual contributions of just £4,000 if they subsequently returned to work – for example people who stopped working during the pandemic and then decided to ‘un-retire’.
That limit was increased in the Budget to £10,000 (the level at which it was originally set when it was introduced in 2015) - an important concession designed to encourage economically inactive people of working age back into the workforce.
Many people returning to employment have had to opt out of workplace pensions, because the £4,000 allowance was lower than the required contributions; they could be beneficiaries of the higher limit. The increase in the allowance could also provide another £1,200 of basic rate tax relief to those affected.
It’s not just those who retired early and are returning to the workforce who will benefit. During Covid there was a significant increase in pension withdrawals, with many accessing pensions benefits due to emergency need. The new, higher allowance will offer these people a way to replenish those pension savings.
There has been much comment about Labour’s immediate pledge to reverse the abolition of the lifetime allowance should they come to power, with the party calling the move a ‘Tory tax cut for the rich’. This is causing uncertainty and a level of concern about whether such a reversal would affect extra pension payments which have been made under the assumption that the lifetime allowance has been abolished.
As the maximum tax free cash figures have been frozen, there is at least some clarity here. But there is always the danger that some will opt to retire early, before any future Labour government changes the rules back.
There will also be worry around people who have elected for enhanced and fixed lifetime allowance protection in the past, these people should have access to a higher amount of tax free cash and a protected lifetime allowance, certain protections can be lost if a person starts to pay into a pension again. Any future reversal could put these people in a worst position.
No-one can know what a future government will do, but even if Labour did reverse Mr Hunt’s announcement, it is quite possible that any new lifetime allowance would be set higher than the £1.073 million level it stood at before its abolition. There is a maximum of two tax years before the next election, so even someone putting in the full £60,000 a year won’t have seen their pension pot grow too much over the current level, even after allowing for investment growth.
The new limits come into force with the new tax year on 6th April. The taper in allowances for very high earners also still applies (albeit at a slightly higher level), so as ever it is important to take expert advice before taking action in response to the Budget announcement.