When I started the day saying to someone that there is always a surprise on Budget day, I was not expecting something so fundamental to my day-to-day life as the abolition of the lifetime allowance.
As with all these things, the devil is in the detail, but this is generally a welcome move and will mean that many people who would have been impacted by charges will now not have them applied.
However, the lifetime allowance isn’t being abolished until 2024, although any LTA charges will not be levied after the end of this tax year.
The timing of this is mainly to do with legislation but it does mean that not all those who have imminent tax charges will be spared.
There seems to be nothing stopping those that hit 75 in the next few weeks from being hit with a charge, or even those that may unfortunately pass away in that time. Given we haven’t seen the legislation, there is still scope for these anomalies to be corrected.
To take account of the abolition of the lifetime allowance and not give complete free reign on tax free cash, a limit equal to 25 per cent of the current lifetime allowance, £268,275, will be imposed.
This shouldn’t impact those with previous lifetime allowance protections, although full details of this are yet to be seen, especially with regards to phased or partial crystallisations.
It is quite surprising that the tapered annual allowance hasn’t been done away with alongside the other changes announced today.Capping tax free cash in this way makes sense because opening all funds up to 25 per cent could see a significant drop in the amount people take that is taxed.
The increase in the Money Purchase Annual Allowance to £10,000 from £4,000 is a positive step, although retaining the MPAA in some form still causes confusion and won’t have the same impact that it could have had if it was scrapped.
This is clearly part of the drive to get those who have taken benefits back into work, but it may not be seen as going far enough to bring back the highly skilled and therefore highly paid people we need in some industries.
Annual allowance
The £40,000 annual allowance and available carry forward has been sufficient for many over recent years, and the greatest impact of the annual allowance is seen in defined benefit schemes where the amount deemed to be saved can’t be controlled to the same extent as in defined contribution schemes.
In defined benefit schemes, inflation and salary increases can play a large part in the amount set against this allowance.
The increase should go some way to helping those in the public sector where the pension scheme forms a large part of their remuneration packages.
This additional amount that can be saved each year will hopefully also help those such as the self-employed or entrepreneurs who may not be in the position to save on a regular basis but want to increase their contributions when times are good or later in life when they are more stable and settled in their businesses.
Savings by the self-employed are always lower than by those who are in employment and with restrictions on the annual savings amount, it is hard for them to catch up.
These changes may seem simple in nature, but the difference this can make to a client may be significant.It is quite surprising that the tapered annual allowance hasn’t been done away with alongside the other changes announced today but the above changes have been factored into the taper, now tapering down to £10,000 and not the previous £4,000.
We assume that this will mean that full taper doesn’t apply until an adjusted income of over £360,000 as the taper now starts at an adjusted income of £260,000 and not £240,000.
By not scrapping this we still have the situation where many can’t determine the amount they could save into their pension until it is too late to do so, because it is determined by total taxable income in the tax year in which the contribution is made.
That being said, the increases mean less people will be subject to the taper in the first place.
In conclusion, these changes may seem simple in nature, but the difference this can make to a client may be significant.
The more detail we get to see, may mean there are other opportunities for pension saving. A little simplification will hopefully go a long way.
Claire Trott is divisional director of retirement and holistic planning at St. James’s Place
