Budget 2023: Advisers welcome LTA scrap but warn of 'snags'

From April 2023, the lifetime allowance charge will be removed, before the allowance is abolished entirely from April 2024.

This is expected to cost the Exchequer £135mn in 2023-24, £210mn in 2024-23 and then £770mn, £800mn and £835mn in the three tax years that follow.

Currently, the LTA caps the total amount a person can save in a pension without having to pay an additional tax charge.

Under previous plans, the LTA was due to remain at £1.073mn up to and including the 2025/26 tax year, although there had been much speculation in the run-up to the Budget that the cap might be lifted to nearer £1.8mn.

This and other limits to tax-beneficial pension contributions have created a number of distortions to both saving for retirement and career decisions for some higher earners.Samuel McGee, Manning Gee Investments

Luke Thompson, a director at PAB Wealth Management, said he had several customers who were approaching their lifetime allowance, pushing them into an early retirement even though they were not necessarily ready to retire. 

“This change will more than likely keep these customers in work until they are ready to retire,” Thompson added.

“By removing the allowance there is a real incentive for people to continue investing in their pensions and keep working until their designated state retirement age.”

But it also looks like it will keep financial advisers in work doing complicated tax planning.

Financial planner Sean Banks, creator of the Lifestyle Finance blog, said: "Anyone else been completely swamped all year so far? With today's budget, doesn't look like there'll be much respite any time soon. Seems there is a supply / demand issue with quality financial planning advice."

Darren Cooke, of Red Circle Financial Planning, tweeted that while Labour leader Sir Kier Starmer might well say: "This Budget changes nothing", that was not quite the reality for advisers. 

He shot back: "Unless you are a pensions adviser; then it changes everything."

According to Evelyn Partners, the absence of an LTA from April will return Britain's pension savers to a state of affairs that existed until 2006 when the limit was introduced at the level of £1.5mn, before rising to £1.8mn in 2011.

While the removal of the LTA marks a welcome and unexpected change of direction as the LTA had been reduced in recent years, and was scheduled to be frozen until 2026, it could lead to problems.

Three potential complications

Gary Smith, financial planning partner at wealth management firm Evelyn Partners, said the scrapping of the LTA had come as something of a surprise, and had introduced some potential snags that could make the benefits of these higher allowances "ambiguous" for some savers. 

One is that a sudden scrapping of the LTA will produce a range of outcomes affecting savers who are in slightly different positions pre- and post-retirement.

Smith said: "It remains to be seen whether likely cliff-edges will be smoothed out in some way."

The second is that the complex tapered allowance remains in place, even with a slightly higher threshold - increasing from £240,000 to £260,000 from 6 April 2023.

Smith added: "For employees, this will mean that someone who is earning enough to take advantage of the improved £60,000 annual alllowance will almost certainly trigger the taper, and therefore never benefit from the extra headroom – unless the taper is reformed. 

“The taper is an ungainly distortion on its own as it punishes those who had hoped to build up their pension pots late in their career when their earnings have peaked, after perhaps a couple of decades of prioritising mortgage payments and the costs of raising children.”

A third complication, according to Smith, could be for those who took out fixed protection against the falling LTA in 2012, 2014 and 2016, and have as a result not made pension contributions for several years in order to preserve previous higher lifetime allowances. They might now consider resuming pension contributions. 

“However, making pension contributions will automatically result in fixed protection being lost, and this would result in tax-free cash reducing to the current level of £268,275,” Smith added.

He continued: "A further risk in abandoning fixed protection is that a General Election is approaching and therefore there is some risk that a change of government could result in the reimposition of an LTA, so Labour’s reaction to these moves will be keenly watched.” 

“That the lifetime allowance was going up today, we knew: that it has been scrapped altogether is a bit of a rabbit out of the pensions hat.

"This and other limits to tax-beneficial pension contributions have created a number of distortions to both saving for retirement and career decisions for some higher earners, so the abolition of the LTA and lifting of other allowances should go some way towards easing those disincentives.  

Annual allowance

Meanwhile, other plans announced by the chancellor, including the fact that the pensions annual allowance has been increased from £40,000 to £60,000, were broadly welcomed.

The annual allowance limits the total amount a person can contribute to a pension in one year without paying a tax charge. 

Meanwhile, the money purchase annual allowance will be increased from the current level of £4,000 to £10,000 from April 2023 - after previously being cut from £10,000 in 2017.

The MPAA, introduced in 2015 to coincide with pension freedoms, is the amount a person who has already begun drawing on their pension can pay back into their retirement pot each year without incurring a tax charge.

Samuel Gee, director at Manning Gee Investments, said the pension reforms announced were a positive step towards incentivising high earners to work and invest in their pensions. 

Gee added: “By increasing the annual pension contribution limit from £40,000 to £60,000, individuals with the means to do so will have more flexibility to save for their retirement.

“Furthermore, the removal of tax charges via the lifetime allowance for pension values exceeding £1,073,100 will be particularly beneficial to high earners, including NHS doctors, who have previously been disincentivised from working due to the pension-tax regime.”

While the chancellor’s announcement is good news for wealthier workers, Carla Hoppe, founder and chief executive at Wealthbrite, said the budget was a missed opportunity to help struggling young people build long-term wealth and secure their financial future.

Hoppe added: “Older, wealthier workers will be able to put more into their pensions while many younger workers are stopping pension contributions because of the cost of living crisis.”

ima.jacksonobot@ft.com

*HMRC later confirmed that as long as those who had applied for fixed protection, had registered for those protections before 15 March 2023, these people would be allowed to ‘break’ these protection rules and keep their higher tax-free cash protection.