Budget 2023: Chancellor abolishes LTA but caps tax-free lump sum
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The government will abolish the lifetime allowance for pensions but is capping the 25% tax-free lump sum at £268,275, while annual allowances are being raised considerably. Chancellor Jeremy Hunt also has plans for further ‘unlocking’ pension fund investment through a new science and tech investment vehicle and faster transfer of local government pension assets into pools.
Labour leader Sir Keir Starmer has slammed the new pensions tax allowances, revealed in Wednesday's Spring Budget, as “a huge giveaway to some of the very wealthiest”.
The pensions tax changes are being made in a bid to keep older workers – especially senior doctors who are both high earners and accumulating generous pension entitlements – in the labour force as the NHS is facing unprecedented pressure and the UK continues to struggle with a tight labour market.
The lifetime allowance is the amount that can be saved into a pension over a lifetime without triggering a punitive tax charge. It will be abolished entirely, the chancellor said in his Budget speech, outdoing speculation about a rise to £1.8m. The government expects the measure to cost it £2.75bn in foregone tax over the next five years.
‘Unpredictable tax charges’
In his speech, Hunt said that “unpredictable pension tax charges” are making doctors leave the NHS just when they are needed the most.
“I don’t want any doctor to retire early because of the way pension taxes work,” he said, adding: “I have realised the issue goes wider than doctors."
Sir Keir responded that the tax cut amounts to a “huge giveaway” for the wealthiest: “The only permanent tax cut in the Budget is for the richest 1%. How could that possibly be a priority for this government?”
The lifetime allowance limit was first introduced in 2006 at £1.5m and rose to £1.8m in 2011. Under former chancellor George Osborne it was cut in 2012, 2014 and 2016, when it reached its lowest level of £1m.
As any amount can now be put into a pension, there will be a new limit on how much may be taken tax-free on retirement, a suggestion the Institute for Fiscal Studies made in early February this year. The Treasury is capping it at 25% of £1,073,100 – the current LTA level – meaning no more than £268,275 of a pension can be taken tax-free.
The annual allowance will continue to exist but rise to £60,000 from £40,000 as trailed in the press, with the minimum tapered annual allowance now £10,000 instead of £4,000 and the adjusted income limit up from £240,000 to £260,000.
The much-criticised money purchase annual allowance, which limits how much can be saved in a defined contribution pension after a pot has been accessed, will be set at £10,000 instead of £4,000.
The government is also making changes so that different versions of public service pension schemes for the same workforce – such as the different NHS schemes – are treated as one arrangement for calculating the pension input amount and annual allowance from April.
The annual allowance measures will cost the exchequer a combined £1.085bn until 2027-28, according to the government. The MPAA change will cost another £170m.
Industry pleased with tax cuts
The pensions industry is showing itself delighted at the possibility of unlimited pension pots, arguing that savers will benefit too. Many pensions groups have been calling for abolishing or raising the various tax thresholds that apply to pensions.
The Society of Pension Professionals has welcomed the changes but said it was uncertain if they would keep people in work.
“It remains to be seen whether this will achieve the chancellor’s aim of encouraging older professionals to stay in work or those out of work, to return,” said SPP president Steve Hitchiner.
The government is signalling the importance of pension saving with the tax cuts, argued Matthew Arends, head of UK retirement policy at consultancy Aon, saying it allows people to save without the need for elaborate tax planning.
“As has been well-publicised, the LTA has come to be regarded as disincentive to pension saving and increasingly a cause of early retirement. Raising the limit can only be a good thing by taking away these issues and freeing people to save in a way that is both far more straightforward and tax-efficient,” he said.
Alan Collins, managing director of consultancy Spence & Partners, noted that "the government has rowed back on a pensions policy that once again had unintended consequences”.
He said the abolition of the lifetime allowance and the 50% increase in the annual allowance were “positive steps which will hopefully get people back into the workforce” but cautioned that lessons must be learned to plan pensions policy more carefully and holistically in future.
“The rules were complex and punished good investment choices,” said David Stevens, retirement director at provider LV. But he warned that many people will not realise the new maximum 25% tax-free lump sum is £268,275.
Meanwhile, the Pensions Management Institute finds that the government has missed an opportunity to do more.
PMI president Sara Cook said: “Having abolished the LTA, the government could have abolished the tapered annual allowance, which continues to be unpopular throughout the pensions industry and also among the general public."
She added that “the tax revenues gathered through the TAA must now be so small that its retention seems hard to justify".
There were no pensions tax changes announced that affect lower earners. Renny Biggins, head of retirement at the Investing and Saving Alliance, welcomed the more generous allowances but said that “the government needs to consider how to improve the pensions savings amongst lower earning individuals and how to make the spread of tax relief and incentives more equitable”.
Chancellor impatient to tap pensions for UK plc
The chancellor also announced plans to channel more DC and LGPS savings into the UK economy. In 2021, the Financial Conduct Authority introduced a new type of investment vehicle so DC schemes can access illiquid assets more easily, and the Treasury mandated that performance fees must be outside the 0.75% charge cap on DC default strategies that is designed to protect scheme members.
Now, the government said it will create “an ambitious package of measures” to get pensions money flowing into the UK’s economy.
Trustees must by law invest in the best interests of their beneficiaries, typically diversifying risk around the globe and investing where they see good risk-adjusted returns or income production that matches pension liabilities.
Trustees must by law invest in the best interests of their beneficiaries, typically diversifying risk around the globe and investing where they see good risk-adjusted returns or income production that matches pension liabilities.
“To develop the next generation of globally competitive companies that grow and list in the UK, and to bolster the retirement incomes of millions of ordinary people, it will be critical to unlock defined contribution (DC) pension fund investment into the UK’s innovative firms,” the Treasury said.
It aims to do this by “spurring the creation of new vehicles for investment into science and tech companies, tailored to the needs of UK DC pension schemes, through a new Long-term Investment for Technology and Science (LIFTS) initiative”. The government is inviting feedback on the design of the competition.
Could government mandate LGPS investment in illiquids?
It also wants to pursue “accelerated transfer of the £364bn Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets”, saying it will “shortly come forward with a consultation”.
In this, the government will propose that LGPS funds transfer all listed assets into their pools by March 2025 “and set direction for the future”, which it suggests could mean a smaller number of pools in excess of £50bn to optimise benefits of scale.
“While pooling has delivered substantial benefits so far, progress needs to accelerate to deliver and the government stands ready to take further action if needed,” the Treasury said.
The government will also consult on requiring LGPS funds to consider investment opportunities in illiquid assets such as venture and growth capital. Hunt’s predecessor Osborne mandated the creation of Local Government Pension Scheme pools in 2015 so local authority funds would invest more in infrastructure and illiquid assets.
The government will also expand the midlife MOT Jobcentre Plus offer to reach more 50+ claimants through support sessions, it said, improve the digital midlife MOT tool and work with employers and pension providers to encourage signposting to the midlife MOT and related support.
What are your thoughts about the pensions announcements in the Budget?
