BudgetMar 15 2023

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

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Budget 2023: Advisers welcome LTA scrap but warn of 'snags'
Advisers discuss Budget changes to pensions and warn of complications. (Myriams-Fotos/Andrea Piacquadio/Thirdman/Dreamstime/Stefan Rousseau/FTA montage/Carmen Reichman/FTAdviser montage)
ByIma Jackson-Obot

Advisers have welcomed the abolition of the Lifetime Allowance - as announced by chancellor Jeremy Hunt in the Spring budget today (March 15).

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."