The pensions industry has branded the pension allowance overhaul in today’s (15 March) Spring Budget as “a huge tax giveaway” and one that might only help “relatively few” people in practice.
As part of his package of economic measures, chancellor Jeremy Hunt scrapped the lifetime allowance (LTA) and increased the annual allowance (AA), money purchase annual Allowance (MPAA) and minimum tapered annual allowance (MTAA).
The AA will increase to £60,000 and the MPAA and MTAA will rise to £10,000.
But the government said it would cap the amount of pension which can be taken tax free to 25% of the current LTA of £1,073,100 or £268,275.
The industry has sent out mixed messages about the move.
Broadstone head of policy David Brooks said the government's move to abolish the LTA and increase the AA was a "huge tax giveaway to wealthiest people in the country".
He said: "Combined with the increase to the MPAA it totals a package that will cost the country over £4bn through the next five years. £2.75bn for the LTA abolition, £1.1bn for the Annual Allowance and £170m from the increase to the MPAA.
"The AA increase again provides a tax bonus for higher earners but is likely to work against the chancellor's aims to create a ‘back to work' budget. That is because those able to pile an extra £20,000 of cash every year into their pension will build their retirement treasure trove far faster and may well be in a position to retire earlier as a result."
Brooks added: "It is hard to escape the view that this package of measures is a political move than seriously, considered pension policy. It is overwhelmingly weighted in favour of the richest who will benefit from significant increases to saving potential. Given the UK already faces a pensions adequacy crisis, it is difficult to see how these giveaways are well-targeted to ensure the nation is in the best possible position to achieve positive retirement outcomes."
While welcoming the reforms, Society of Pension Professionals president Steve Hitchiner also queried how many people these measures would actually help in practice.
He said: "The abolition of the pensions LTA and raising of the AA will always be welcome in terms of encouraging long-term retirement savings, but they affect relatively few people in practice. It remains to be seen whether this will achieve the chancellor's aim of encouraging older professionals to stay in work or those out of work, to return."
People's Partnership director of policy Phil Brown agreed the changes to pensions allowances won't help majority of savers.
He said: "At a time when the NHS is facing significant challenges, any measure that encourages valued and experienced doctors to continue working is to be welcomed, but today's announcement on the LTA and AA will do nothing to solve the problem of under-saving in the UK.
"These changes to the pension allowances won't impact the vast majority of hard working savers and means very little to the millions of people who save through auto-enrolment. Reform to workplace saving will be the only way to ensure that millions more people can save enough to live on in retirement."
Despite this, Quantum Advisory consultant Sarah Garnish said the move would help with some of the issues in the NHS. She said: "The abolition of the LTA will benefit a considerable number of people and is likely to keep NHS doctors and other professionals working until later in life."
The Pensions Management Institute (PMI) said the abolition of the LTA would allow savers to more for their retirement without suffering any tax penalty - adding the new value of £60,000 for the AA would give savers far more scope for preparing for their retirement.
It added the increase in the MPAA would be welcomed by older people who are considering a return to work after having started to draw benefits from a defined contribution (DC) pension arrangement.
However, PMI president Sara Cook also rued a missed opportunity.
She said: "Having abolished the LTA, the government could have abolished the tapered annual allowance (TAA), which continues to be unpopular throughout the pensions industry and also among the general public.
"As chancellor, Rishi Sunak changed the TAA thresholds to levels that only affect a tiny percentage of pension savers. The tax revenues gathered through the TAA must now be so small that its retention seems hard to justify. The chancellor has missed an opportunity to abolish a measure that has few admirers."
Spence and Partners managing director Alan Collins said the government had "rowed back" on a pensions policy with unintended consequences - noting the abolition of the lifetime allowance and the 50% increase in the annual allowance were "positive steps" which would hopefully get people back into the workforce.
But Collins also thought that, while today's measures were to be welcomed, issues remained. He said: "Both tax relievable pensions input and tax relievable pensions output need to be addressed. In particular, complex provisions such as MPAA are completely inconsistent with freedom and choice and changes in the way people will need to balance work and retirement in future as the 'cliff edge' is replaced by a 'multi-stage life'."
National Pensions Trust head Paul Armitage also welcomed the government's move but said he was concerned the "constant chopping and changing of the pension rules just leads to complexity and confusion".
He said: "We need a cross party consensus that puts pensions saving, and in particular tax relief, on a long term footing. If this gets reversed early in the next parliament then these changes will have been pointless and arguably would have done more harm than good."
Armitage added: "What's missing from this Budget is a strategy for improving long-term saving for everyone, including the lowest earners. It's all very well increasing the LTA and AA to solve some particular issues, but this largely affects the better off. What we need is a strategy for getting more people saving more, including looking at minimum contribution rates, and we think that the money could be better spent in helping more people achieve a better level of income in retirement."
Importance of saving
Aon head of UK retirement policy Matthew Arends said the government's move signalled to all adults the importance of saving for retirement.
He said: "With no LTA, people can save without the need for elaborate tax planning… Without the concern of working around this artificial, tax-driven ceiling people can simply save as much as they can to support their old age as comfortably as they can.
"This is especially good news for the next generation of private sector pension savers - Generation X - the majority of whom have had limited access to final salary pensions and who are now within ten to 15 years of their potential retirement date."
Arends added: "As has been well-publicised, the LTA has come to be regarded as disincentive to pension saving and increasingly a cause of early retirement. Raising the limit can only be a good thing by taking away these issues and freeing people to save in a way that is both far more straightforward and tax efficient."
Baker McKenzie pensions partner Jonathan Sharp also backed the government's move.
He said: "The government has realised that it had cut the pensions annual and lifetime allowances too far. At the point NHS doctors started being impacted, the government decided that the limits had moved away from the original policy intent of only impacting a small minority of high earners, and that action needed to be taken. And it has definitely taken action by abolishing the lifetime allowance completely and increasing the annual allowance by 50% to £60,000.
"However, while encouraging doctors back to work may be the main motivation, the government acknowledged that the issues were being felt more widely, so this will be a welcome change for other taxpayers who can piggyback off the changes."
Aegon pensions director Steven Cameron said the increase in the MPAA would have a particularly significant impact and support a greater number of over 55s either staying in or returning to the workplace.
He said: "Many individuals over 55 who have taken income ‘flexibly' from their money purchase pension may not have realised that by doing so, they reduce the maximum they can then save in a pension. They may have done so because they lost their job or needed extra funds to tide them over during the pandemic or the current cost of living crisis.
"At its previous level of £4,000, there was a real risk it stopped individuals re-entering the workforce from benefitting fully from the workplace pension that came with the job."
Cameron also said having more over 50s in work would also limit the cost of the pensions measures.
He said: "While scrapping the LTA and increasing other allowances will mean some individuals receive more in tax relief and hence pay less in income tax, and fewer will pay a tax penalty on breaking the limits, these ‘losses' to the Exchequer should be more than compensated for by having a larger working population paying income tax."
A flood of money
Lane Clark & Peacock (LCP) partner and former pensions minister Steve Webb said money would "flood" into pensions from higher earners as a result of the reforms.
LCP estimated that over 1.5 million non-retired people are either already over the LTA or could have expected to be so based on the previous policy - adding that the majority of these would now be free to save more.
It said that, including those able to save more following lifting of the AA and MPAA it is estimated that at least two million people will now be freed to save more into a pension as a result of the Budget.
Webb said: "For more than a decade we have seen a series of big cuts to annual and lifetime limits to pension tax relief, resulting in large numbers of people being unable to save more into a pension without incurring an extra tax bill.
"Today's Budget represents a sea-change in government policy and will set millions of people free to save more into pensions. We are likely to see a flood of new money into pensions from higher earners."