Budget: Pension shake up to be a ‘game changer’

As Chancellor Jeremy Hunt prepares to give his first full Budget tomorrow, the expected increase in the amount that individuals can accumulate in their pension savings before paying tax is a “game-changer,” according to Nigel Green, CEO and founder of deVere Group.

The lifetime allowance (LTA) is the maximum people can contribute to a pension – at present £1.07m – before facing tax charges.  The LTA was originally set at £1.5m when it was introduced in 2006. It steadily increased to £1.8m in 2010, but fell to £1m in 2016.

Green says: “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,” concludes Nigel Green.

deVere Group is one of the world’s largest independent financial advisory organisations.

Meanwhile, leading flat fee online stockbroker interactive investor reports that the ‘Lifetime allowance’ has more than halved in real terms since 2007 and would be worth £2.3 million today.

Interactive investor calculates that had the lifetime allowance gone up in line with inflation, it would be worth £2,288,419 compared to the £1,073,100 – that’s a difference of £1.2m. Following speculation that Chancellor Jeremy Hunt is considering raising the pension lifetime allowance in his budget tomorrow, Alice Guy, Head of Pensions and Savings at interactive investor says:

“The lowering and then freezing of the lifetime allowance means that a punitive 55% tax rate, originally intended for the super-rich is catching more and more ordinary pension savers in the net.

“The lifetime allowance at its current level is becoming increasingly difficult to justify and is incompatible with the Government’s aim to support older workers. Many doctors are leaving the profession before retirement age, partly to avoid triggering a 55% tax charge once their pension entitlement reaches a level of around £53,000 (the level defined benefit pensions can reach before breaching the allowance).

“The lifetime allowance has more than halved in real terms since its introduction in 2006 would be £2.3 million if it had risen in line with inflation. This means the 55% tax penalty is catching out hard working doctors, senior teachers and civil servants and encouraging them to leave the workplace. It also has a chilling effect on pension saving, even among those with smaller pots, as many investors worry they could face heavy tax charges in the future if their investments perform well.

With more of us living for longer we need to have a generous pension system to encourage people to save enough for a comfortable retirement.”

Lifetime allowance trigger

The tax charge is also encouraging senior public sectors workers like doctors, and senior civil servants to retire early, exacerbating the staffing crisis in the NHS. Someone with a defined benefit pension would trigger the lifetime allowance charge once their annual pension income hits £53,655: the lifetime allowance rules are slightly more generous for people with a defined benefit pension.

For defined contribution pension savers, a pension pot worth £1,073,100 would currently buy them a pension income worth around £48,225, assuming they bought an annuity at 65-years-old which escalates 3% per year with a 50% joint life element (annuity figures from sharing pensions).

Interactive investor calculations show that the lifetime allowance has more than halved in real terms since it was introduced in 2006/07, once inflation is taken into account.
 

Table showing how much lifetime allowance would have gone up with inflation

And James Jones-Tinsley, Self-Invested Pensions Technical Specialist at Barnett Waddingham offers his thoughts on pension predictions surrounding the Lifetime Allowance, state pension age and the triple-lock:

 
“This ‘back to work Budget’ is shaping up to be the long-awaited pensions Budget too. If the rumours are true, we’re set to see an increase in the Lifetime Allowance to up to £1.8m – the highest it ever reached back in 2010-12 – and the Annual Allowance up to £80,000. The big red book will reveal whether this helps individuals who have already used all of their Lifetime Allowance by taking partial retirement; under the current percentage-used system, they may not benefit, and the policy won’t be as effective in prompting a return to work.

“If the Government stops there, it will be a cause for celebration. However, in the current economic climate, we are likely to see any good news come with a twist of lime. The world’s worst kept secret is Mr Hunt’s ambition to increase the State Pension Age to 68 in the mid-2030s. And if the state pension is on the agenda, we may also see a discontinuation of the triple lock for future state pension age increases. This would be good news for the Government coffers, but bad news for the one in five Brits who are solely reliant on the state pension for retirement.”