With the Lifetime Allowance being abolished there has been an increase in pension contributions and many are delaying their retirement.
On the 15th of March 2023, Chancellor Jeremy Hunt announced they were abolishing the Pension Lifetime Allowance (LTA). This meant individuals were no longer going to be penalised for their pension savings growing more than the LTA limit of £1,073,100. Before this tax year, individuals were being charged steep tax penalties on any funds taken out of their pension above the LTA limit (55% on lump sum withdrawals).
So how has the removal of the LTA charge changed retirement planning and saving?
In this country, employers are required to contribute a minimum of 3% to their employees’ pensions on an auto-enrolment basis. This is a valuable benefit which can build up pension benefits over time. Individuals that were approaching the LTA limit were being discouraged from continuing working. This was particularly difficult on NHS staff and Civil Service employees who have little control over the size of their DB pensions. Now employees can choose to work for longer and retirees can consider re-joining the workforce.
This could lead to greater macroeconomic performance in the UK economy and reduce the loss of valuable experienced workers.
Before the 6th of April 2023, an individual’s pension benefits were tested against the lifetime allowance at age 75, irrespective of whether they had taken anything from their pension assets. This meant many individuals were having to take funds out of their pensions purely to avoid LTA tax charges.
The downside to this was they paid income tax on the proceeds and brought the funds into their estate for IHT purposes. With no more LTA tests, our clients can leave their pension assets within the tax-efficient pension wrapper indefinitely. This way, ensuring more funds are left to their loved ones on death.
Before the removal of the LTA tax charge, the allowance had been severely cut over the past few years. In 2012, 2014 and 2016, some individuals had the opportunity to take out fixed protection against the falling allowance. The criteria for these protections required the claimants to cease all pension contributions. HMRC have confirmed that should individuals with fixed protection wish to restart their pension contributions, they can do so without losing their protected tax-free cash amount.
According to a study done by Investec Wealth & Investment, the announcement has led 51% of people to restart, increase or plan to increase their pension payments. 23% of people have delayed their planned retirement date or will likely delay it as they are no longer facing punitive tax penalties. Nearly 10% of people have come out of retirement as a result, and a further 6% said they plan to rejoin the workforce.
The abolishment of the LTA will undoubtedly benefit many of our clients and their families. It should help simplify some decisions surrounding retirement and help people feel more confident about their pensions lasting their lifetime and allow them to save for a more comfortable retirement.
As always, there is an element of political risk in our industry, and there is no guarantee these changes will remain permanent. Therefore, at Anstee and Co we would encourage all individuals to make use of these allowances whilst they are available.
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