Speculation is building to fever pitch that the UK's pension savings lifetime allowance is going to rise significantly, even to return to its previous height in 2010/11 of £1.8m, a near 70% jump from its current level £1,073,100.
Elsewhere, there are claims that the annual allowance is going to grow from £40,000 to £60,000, which does not get anywhere near its highs of £255,000 in 2010/11.
Among latest industry comments, Jon Greer, head of retirement policy at Quilter said: "In the 2021 Budget, the lifetime allowance was due to be frozen at its current level till April 2026. On the basis of costings at the time this would have raised an additional £1bn of tax over the period although it was thought this was a significant underestimate.
"In this complete U-turn of approach, the cost of increasing the lifetime allowance so materially will come under close scrutiny as its expected that the change to the LTA and AA could cost billions a year. Initial cost estimates, as well as the Treasury's own budget policy costings, are inherently open to a high degree of uncertainty in this area though.
"These changes for high earners are not inconsequential and if the lifetime allowance does jump to £1.8m then this could result in a benefit to an individual (who has a fund of £1.8m) of around £181,725 due to saved tax.
"Both potential changes are likely going to be packaged in a way that makes it seem like this is to get over 50s back to work, when arguably it may have the opposite for some who will be able to fund their retirement earlier. Perhaps the reality is the government are trying to fix a problem of senior public sector employees leaving the workforce, which inadvertently is a problem of their own making.
"For senior doctors and others nearing the lifetime allowance, the current limits provide a serious disincentive to keep working as any contributions will be heavily taxed. This and annual allowance issues have been plaguing the health service and causing serious retention issues in recent years. The government are under pressure to keep the NHS afloat, and this change may be mainly directed at this group as they are unable to flex their pension accrual in the way a defined contribution pension savers can.
"The lifetime allowance is a simple and effective way of limiting tax-privileged pension saving over a lifetime but has some significant drawbacks. As it applies to the value of pension savings accumulated, including investment returns as well as pension contributions, people can inadvertently exceed the lifetime allowance even if they stop actively contributing while still some way below it.
"This is a little opaque and difficult for people to manage - and to some extent unfair. It can also lead to odd behaviours for example, leading them to invest their pension savings in lower-risk, lower-return assets or even to start withdrawing money from their pension earlier, in order to avoid accidentally exceeding the limit. Increasing the lifetime allowance to £1.8m will move the goal posts for many savers, removing great swathes of complex transitional rules that were introduced when the limit was lowered periodically over the last decade.
While Tom Selby, head of retirement policy at AJ Bell, said: "After over a decade of persistent cuts to retirement savings incentives by successive governments, this finally looks like it could be a Budget that boosts pensions for hard-working Brits.
"Reports of senior doctors retiring early due to the impact of pension tax allowances - in particular the annual and lifetime allowance - have undoubtedly been of particular concern to the government given the pressures already on the health system following the pandemic.
"Raising the lifetime allowance beyond £1.5 million and the annual allowance to £60,000 would significantly reduce the risk of NHS staff being hit with a pensions tax charge for working extra hours. However, both the lifetime and annual allowance apply across all types of private pensions and so this announcement would increase the retirement savings limits for millions of Brits.
"It's worth remembering that in 2010/11 the lifetime allowance stood at £1.8 million and the annual allowance £255,000, so even these increases wouldn't take us back to those halcyon days. Nonetheless, any rise in allowances would represent a major and welcome departure from recent trends.
"The money purchase annual allowance (MPAA), which applies to those who flexibly access their private pension post-55, is set at such a low level it risks acting as a significant disincentive to work. Given the challenges facing the UK economy this is clearly undesirable, and so raising the MPAA back to £10,000 - the level it was originally introduced at in 2015 - would be a sensible, pragmatic step."
"The constant salami slicing of pensions allowances we have seen in recent years have not only reduced retirement savings incentives for Brits directly - they have also created unwieldy complexity which makes explaining the benefits of pension saving unnecessarily difficult.
"There are currently three versions of the ‘annual allowance', a non-earners allowance, a lifetime allowance and seven different versions of lifetime allowance ‘protection'. Raising three of these allowances would be a positive step in the right direction, but nobody would create a system that looks like this from scratch. As is often the case, complexity has built incrementally over the years.
"As automatic enrolment introduces millions of people to pension saving, many for the first time, there has to be hope that engagement levels will improve. If that happens, we need to make sure the system they engage with makes sense and is relatively straightforward to understand. Ideally, there also needs to be at least some confidence the rules won't retrospectively change in the future.
"To reach this point, a new independent pensions commission should be formed with the aim of delivering proposals which simplify the system and encourage more people to save for their financial future."
How have the lifetime allowance, annual allowance and money purchase annual allowance changed since 2010?
|
Year |
Lifetime allowance |
Annual allowance |
Money purchase annual allowance |
|
2010/11 |
£1,800,000 |
£255,000 |
|
|
2011/12 |
£1,800,000 |
£50,000 |
|
|
2012/13 |
£1,500,000 |
£50,000 |
|
|
2013/14 |
£1,500,000 |
£50,000 |
|
|
2014/15 |
£1,250,000 |
£40,000 |
|
|
2015/16 |
£1,250,000 |
£40,000 |
£10,000 |
|
2016/17 |
£1,000,000 |
£40,000 |
£10,000 |
|
2017/18 |
£1,000,000 |
£40,000 |
£4,000 |
|
2018/19 |
£1,030,000 |
£40,000 |
£4,000 |
|
2019/20 |
£1,055,000 |
£40,000 |
£4,000 |
|
2020/21 |
£1,073,100 |
£40,000 |
£4,000 |
|
2021/22 |
£1,073,100 |
£40,000 |
£4,000 |
|
2022/23 |
£1,073,100 |
£40,000 |
£4,000 |
Source: AJ Bell; HMRC
Nigel Green, DeVere Group CEO, also weighed in saying: "We welcome reports that Chancellor Jeremy Hunt has decided to raise the lifetime allowance (LTA) on pension savings to £1.8m in tomorrow's Budget.
"Following years of successive cuts and holding firm, this is a game-changer.
"It is likely to spur millions of people into reviewing their pension saving plans as they seek to build up more funds for their retirement.
"This is a win-win scenario for the UK economy and individuals.
"This move serves as an incentive to save as much as possible for retirement and encourages older people to return to the workforce, thereby boosting Britain's chances of long-term economic prosperity.
"It also highlights that retirement finances are increasingly a personal responsibility. It's becoming clearer that the government won't be able to support and provide for its citizens as it has done for generations before due to an ageing population and shrinking workforce; weaker economic growth; rising living, health and care costs; less generous company pensions if they exist at all; and the fact we're living longer, meaning that accumulated funds need to go further. As such, moves to encourage saving must be championed."
There is also hope that Mr Hunt in the Budget tomorrow will announce "a much-needed wider review of the pension tax regime" which has become "increasingly and unnecessarily" complex in recent years.
"We expect a surge in enquiries from tomorrow as people, sensibly, review their retirement planning to take advantage of the LTA changes," Green said.
Lily Megson, policy director of My Pension Expert, said: "Jeremy Hunt was thrown a hospital pass when he took over as Chancellor following Kwasi Kwarteng's disastrous mini-Budget. But tomorrow is his chance to give much-needed detail about how he plans to rebuild a UK economy teetering on the brink of recession and, moreover, provide vital assurances to Britons who are trying to manage their finances and plan for the future amid such turbulence.
"For certain, 'early retirees' will come into Hunt's crosshairs. For months now he has heralded his intention to get over-50s back into work in an effort to tackle economic inactivity, with those who retired during the first two years of the Covid pandemic a particular focus. Reports suggest that increasing the lifetime allowance and the £40,000 annual cap on tax-free contributions to pensions are among the Budget's policy reforms that will support Hunt's attempts to keep people working longer.
"However, while such changes would come as a boost to some, the underlying issue is that the Chancellor risks demonising those who do not want to work until their late 60s. Instead of trying to force retirees back into employment, the government ought to empower them to plan for the future they want and deserve. Namely, the Budget should include plans to ensure more people can access the information and advice they need to make informed decisions, putting them in control of their retirement plans.
"Skills bootcamps, ‘midlife MOTs' and sickness benefits reform are also likely to feature in Hunt's "back to work" Budget. Whether he gives the same amount of attention to those feeling pressured to delay or come out of retirement after decades of hard work and diligent saving due to soaring cost of living - only time will tell."
Today's labour market data shows that the number of people aged 16-64 who now say they are retired has fallen to 1,110,000 in November-January 2023. That's a drop of 7% in the number of early retirees (people aged 16-64 who say they've retired) in the last six months from 1,196,000 (May-Jul 2022), with around 90,000 re-joining the workforce.
It suggests that cost of living pressures driving ‘The Great Unretirement' could be persisting into 2023 and coupled with the market volatility, which has affected the value of many people's pension savings, may challenge more older workers to give up the early retirement dream.
Combined with a growing cohort of defined contribution pension savers reaching retirement with typically smaller pots than their defined benefit counterparts and the expectation of longer lives, the early retirement dream may fade over the coming months according to Stephen Lowe, group communications director at retirement specialist at Just Group.
"The cost of living crisis and market volatility are likely to have contributed to driving a number of early retirees back into the workforce over the past year," he said.
"Those who may have felt able to retire before claiming the State Pension will have seen their household budgets squeezed as everyday items soared in cost. At the same time, many will have seen turbulence in the financial markets hit the pension savings and investments they were relying on to bridge the gap between giving up work and receiving the State Pension.
"The hard realities of how tricky it is to make a defined contribution pension last securely for a full retirement will have been brought home to many, and as defined benefit pensions disappear from the private sector this challenge will only grow for the UK's workforce. These defined contribution pensions will also be expected to last longer as longevity nudges upwards.
"Tomorrow's Spring Statement may bring measures designed to attract workers back to the labour market, including a possible acceleration of the State Pension Age. This change would see UK workers faced with the stark choice of either working longer or working out how to fill the financial gap until they get their State Pension."
Background
AJ Bell has set out the background to the potential areas of change expected in tomorrow's Budget.
What is the lifetime allowance?
The lifetime allowance caps the total amount you can save in a pension without having to pay an additional tax charge.
While the current level is just over £1 million, over the years successive governments have whittled the figure down in a bid to raise revenue for the Exchequer (in fact back in 2011/12 the figure was as high as £1.8 million).
Each reduction in the lifetime allowance has resulted in the creation of a new set of ‘protections', allowing some people to keep a higher personal lifetime allowance.
Your pension savings will be tested against the lifetime allowance when a ‘benefit crystallisation event' occurs. These events include taking tax-free cash, buying an annuity, entering drawdown, starting a scheme pension (if you have a defined benefit pension) or taking an ad-hoc lump sum (sometimes referred to as ‘UFPLS').
A test will also be carried out on your 75th birthday if you have funds that haven't been used to buy an annuity or provide a scheme pension - including any growth your fund has enjoyed if you have chosen to remain invested in retirement in drawdown.
How the lifetime allowance charge works
If you breach the lifetime allowance, a charge will be applied to the excess. This charge will be 25% if the money is left in the pension or 55% if taken out of the pension.
Take, for example, someone who breaches the lifetime allowance by £1,000. If the excess is left in the pension, a 25% charge will be applied, reducing the fund to £750. When these funds are later withdrawn, if income tax is paid at 40%, the amount the person will receive after tax will be £450.
If the person instead takes the £1,000 out as a lump sum, they will pay a 55% lifetime allowance charge (and no income tax), meaning they also end up receiving £450.
For this reason, if you expect to pay less than 40% tax on your withdrawals it can make sense to keep your excess in the pension and pay the 25% charge.
What are the annual allowance and money purchase annual allowance?
The annual allowance limits the total amount you can contribute to a pension without paying a tax charge. This covers personal contributions, employer contributions and tax relief. It is currently set at £40,000 a year.
The money purchase annual allowance applies to anyone who has ‘flexibly accessed' taxable income from their pension. Once triggered, it reduces your annual allowance from £40,000 to just £4,000. It also removes the ability to ‘carry forward' unused annual allowances from the three previous tax years.
The term ‘flexibly access' mainly refers to taking income via drawdown, where your pension is invested and you take an income to suit your needs, or ad-hoc lump sums direct from your DC pot. Taking an income in DB or buying a lifetime annuity won't trigger the MPAA.
If you breach your annual allowance, you will face an annual allowance charge designed to remove the upfront tax relief your contribution would have received.
That means a basic-rate taxpayer would pay a 20% charge, a higher-rate taxpayer 40% and an additional-rate taxpayer 45%.
Can you access your pension without triggering the MPAA?
There are a few other ways to access taxable income from your pension without triggering the MPAA:
1. Just take your tax-free cash. While accessing taxable income flexibly from your pension will trigger the MPAA, withdrawing your tax-free cash won't. It is possible to ‘partially crystallise' your fund so you just take out the tax-free cash you need, with the rest left in your fund and able to grow tax-efficiently.
2. Take a small pot withdrawal. If your fund is worth £10,000 or less you can withdraw both the tax-free and taxable element flexibly without triggering the MPAA. You must extinguish the entire fund in order not to trigger the MPAA. You can take up to three small pot withdrawals worth £10,000 or less from personal pensions in your lifetime and an unlimited amount from workplace pensions.
3. Capped drawdown. Capped drawdown is no longer available, but some savers who were in capped drawdown before April 2015 have remained in it. Provided any withdrawals taken via capped drawdown do not exceed the maximum income limit (150% of the GAD annuity rate), the MPAA will not be triggered.
