The Chancellor of the Exchequer, Jeremy Hunt, has today delivered his Budget Statement.
It was widely reported in the press yesterday that the Chancellor would announce that the pension Lifetime Allowance (LTA) would rise from the present £1,073,100 to £1,800,000. However, in a surprise announcement, the Chancellor has decided to abolish the allowance altogether.
The LTA was the amount of pension you can save before you are taxed on it. Any amount you have in your pension above the LTA was subject to a tax charge of up to 55%. This charge will be removed from 6 April 2023 before fully abolishing the LTA from April 2024. The maximum Tax-Free Cash Lump Sum for those without LTA protections will be retained at its current level of £268,275 and will be frozen thereafter.
Its abolition will be welcome news for many pension savers who can continue to save or draw their pension benefits without being concerned about this penal charge. It will also remove the financial disincentive which was affecting many senior doctors and consultants in the NHS who had been reducing hours or retiring early, as the tax charges outweighed the benefits.
In addition, it has been announced the Annual Allowance for pension contributions, which has been subject to much of the same debate, will rise from £40,000 to £60,000 and individuals will continue to be able to carry forward unused Annual Allowances from the 3 previous tax years. Furthermore, the Money Purchase Annual Allowance, which limits the amount people can put into their pension tax-free after accessing their pot, is also set to rise from £4,000 to £10,000. The minimum Tapered Annual Allowance will also increase from £4,000 to £10,000 from 6 April 2023 with the adjusted income threshold for the Tapered Annual Allowance set to be increased from £240,000 to £260,000.
Paul Morton, Investment Planning Director, comments: “Pensions have previously suffered from a ‘cap’ (LTA) and ‘collar’ (AA) structure, i.e. the amount you could build up in a pension was being squeezed from two angles. Removing the ‘cap’ and loosening the ‘collar’ allows a bit of breathing room and is a step towards a simpler system for pensions.”