05 September 2023
Jeremy Hunt’s abolition of the lifetime allowance for pension savings back in this year’s Spring Budget came as a welcome surprise for those with substantial pension pots. However, Labour’s vow to reintroduce the allowance creates a difficult decision for those still looking to build their pension savings.
The lifetime allowance was introduced back in 2006, and despite various increases and decreases to its value, the concept has not changed a great deal since its introduction. The allowance served as an upper limit to the value of an individual’s pension pot, above which, penal tax charges would apply in various instances, such as when benefits were crystallised.
The argument against a cap on pension savings has always been that it is in everyone’s interest, including the state’s, for individuals to save for retirement, but if too much is saved, or investments within the fund perform well, the individual is penalised.
The changes in the Spring Budget are therefore positive for those taxpayers who are between 55 and 75 years old, being the current private pension retirement age and the current pension benefit crystallisation event age, respectively, and are considering accessing their pension pots. There is now an opportunity for these individuals to access lump sums from pension savings in excess of the previous lifetime allowance of £1,073,100 at a lower tax cost than would have been the case prior to 6 April 2023.
However, the changes do put those who are not yet 55 into a quandary. On the one hand, there is a fantastic opportunity to top up their pension savings, making the most of the absence of a lifetime allowance as well as the newly increased annual allowance. On the other hand, current polls are suggesting a Labour win in the next election, which could see an anticipated reintroduction of the lifetime allowance, in one form or another, and could cause these additional contributions to be taxed at a higher rate than if they had not been saved in the first place.
Those who are willing to seize the opportunity now may be banking on the introduction of a ‘protection’ from a future lifetime allowance charge, which is the approach that has been used historically when the value of the lifetime allowance has been reduced. Broadly, a protection could potentially freeze the member’s lifetime allowance at the time of any change, but disincentivise any further contributions from being made. The problem is that there is no certainty that this, or a similar approach, would be taken by Labour, given the opportunity.
The potential issues may be deeper for self-employed individuals or company shareholders/directors, who may use a pension, such as a small self-administered scheme (SSAS), to hold assets other than traditional investments. Take, for example, an entrepreneur whose SSAS holds some shares in their early-stage start-up company. These shares could have the potential to grow significantly, which could cause the value of the wider pension pot to grow far beyond the old £1,073,100 lifetime allowance. If the shares were transferred to the pension now, there would be no lifetime allowance issues to consider. However, if the allowance was reintroduced, the entrepreneur is facing some potentially significant tax charges on assets which may very well represent their retirement fund and which would not have been due had they kept the shares in their personal name.
As it stands, the abolition of the lifetime allowance has further increased pension freedoms in the UK, which is vital in encouraging individuals to make provision for their retirement. However, with the threat of further changes on the horizon following the general election, it is difficult for savers to move forward with any confidence.