Pension allowances should be reviewed in 2023 to strive for more simplicity in pensions, according to Claire Trott, divisional director of retirement and holistic planning at St James's Place.
Trott said with a Spring Budget planned for March 15, and the lack of tinkering to pensions in the Autumn Statement, advisers could be in for changes to pensions very soon.
She said: “I am not proposing that the government are going to scrap tax-free cash.
“It is about time that tax relief gets another review, despite the previous ones having resulted in no change, and any plans being added to the ‘too hard’ come back to later pile.”
But Trott is hoping that a review of all the pension allowances could be on the cards.
“With multiple annual allowances and a frozen lifetime allowance I yearn for the days of pre-A-day simplicity,” she said.
Trott argued the government could split the different types of pension scheme and deal with the allowance according to how they are funded.
“Defined benefit schemes lend themselves to testing on payment so you know what you are aiming for, which would solve a lot of the issues for the public sector schemes,” Trott said.
“Defined contribution schemes could be tested on contributions made given that is the bit you can quantify and doesn’t penalise you for investment growth. There is of course precedent for these methods, again looking back to pre-2006 where this was the case, split by occupational and personal.”
But what Trott did not want to see was the freezing of the lifetime allowance any longer, and no additional layers of complexity when it comes to the annual allowance.
The lifetime allowance, the amount a pension holder can benefit from without having to pay extra tax, was frozen at £1,073,100 in the 2021 Budget by former chancellor and current prime minister, Rishi Sunak.
Back in November analysis from LCP found the government’s decision to freeze the lifetime allowance could yield up to £2bn for the Treasury, double the £1bn it previously projected due to a surge in inflation this year.
“Inflation has been far higher than expected, which means that the freezing of the lifetime allowance ‘bites’ much more than the Treasury assumed when the policy was announced,” LCP explained.
Trott said advisers will spend the end of 2022 reviewing and possibly moving investments to ensure allowances are used before they drop in April.
She said: “With so many moving parts, advisers will have their work cut out over the coming months reviewing their clients plans to ensure they are still as tax efficient as possible.”