When Jeremy Hunt, the Chancellor of the Exchequer, presented the Budget on 15 March he made the surprise announcement that the lifetime allowance will be abolished from 6 April 2023. The lifetime allowance is a cap on the value of pensions of £1,073,100 above which a tax charge of 55% will apply as a result of a Benefit Crystallisation Event or BCE. The problem is HMRC has 13 BCEs. The tax charge is exorbitant.
The Lifetime Allowance was introduced in April 2006. Prior to this we only had limits on contributions. It has never made sense to me to have a cap on both contributions and the size of your pension. If you have a cap on contributions you do not also need a cap on the size of your pension pot. This recent announcement simply puts us back to the situation we were in before April 2006. Jeremy Hunt has announced a cap on contributions only.
He also announced some other pension changes such as increasing the annual allowance from £40,000 to £60,000 from 6 April 2023. The government will increase both the Money Purchase Annual Allowance and the Tapered Annual Allowance from £4,000 to £10,000 from 6 April 2023 too. The adjusted income threshold for the annual allowance will also be increased from £240,000 to £260,000 from 6 April 2023 as well.
However, the maximum tax-free cash lump sum will remain at 25% of the existing Lifetime Allowance level of £1,073,100 resulting in a maximum amount of £268,275 which will be frozen.
So yet again the government is freezing an allowance at a time of high inflation which in effect increases taxation.
Read my recent blogs on the Lifetime Allowance and the Annual Allowance for more insights.
The reason the Conservatives have decided to make these changes is to encourage the over-fifties to return to work. The Conservative reforms announced in the Budget followed a long campaign from NHS doctors, for whom pension tax rules have been a major obstacle. Unlike private sector workers, they are unable to control how much money goes into their pension because they are members of a generous “defined benefit” scheme. For many, the only way to avoid large, unexpected tax bills has been to reduce their working hours or retire early.
Ministers are concerned because the UK is the only major country where economic inactivity – the number of people aged between 18 and 65 who are not in work – is higher than before the pandemic.
However, Labour immediately said it would reverse the changes if it wins the next election.
Rachel Reeves, the shadow chancellor, said: “At a time when families across the country face rising bills, higher costs and frozen wages, this gilded giveaway is the wrong priority, at the wrong time, for the wrong people.”
“That’s why a Labour government will reverse this move. We urge the Chancellor and the Conservative government to think again too.”
At the time of writing, Labour has a 22-point lead over the Conservatives, according to a recent YouGov poll. The next general election must be held by January 2025, meaning the Lifetime Allowance could be reinstated after just 9 months of the 2024/25 tax year by a new Labour administration and could be backdated to April 2024. Furthermore, it is not beyond the bounds of possibility that Labour, if elected, could reinstate the Lifetime Allowance for the 2023/24 tax year too, although I consider this highly unlikely.
Reinstatement of the cap at £1.073m under Labour could hit around as many as two million non-retired people, according to new estimates from the consultancy LCP.
The problem is that the Conservatives haven’t actually abolished the Lifetime Allowance. All they have done is announced it will not apply from 6 April 2023 for the next tax year 2023/24. They have yet to create the Finance Bill which will lead to the Finance Act which will abolish the Lifetime Allowance from 6 April 2024.
This puts the public in the unique position of knowing this could well be a one-tax-year-only opportunity to crystallise their pensions and avoid the punitive 55% tax charge on what would have been a benefit crystallisation event (BCE).
Sir Steve Webb, a former pensions minister and now partner at LCP, said that the threat of a Labour government could spark a “stampede” of people saving into their pensions today and retiring before Labour overhauls savings rules.
“People will max out the size of their pot and then, if they think a Labour government is imminent, will ‘cash out’, just before the election and take their pensions,” he said.
So ironically Labour’s pledge to reverse the “abolition” of the Lifetime Allowance could have the opposite effect. Instead of attracting back to work prematurely retired people, it may actually incentivise them to take their retirement benefits early instead.
If your pension/s are close to or in excess of the Lifetime Allowance you need to get professional advice on your retirement options. You know it makes sense.*
*All measures remain potentially subject to change until enacted into legislation. The Spring Budget included the abolition of the pensions Lifetime Allowance alongside increases to the Annual Allowance, Money Purchase Annual Allowance and the Adjusted Income limit and minimum level for the Tapered Annual Allowance.
The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this blog is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.