An abolition and later reinstatement of the lifetime allowance (LTA) would increase complexity for a pension system which is already in “dire need” of simplification, the Society of Pension Professionals says.
In this year's Spring Budget on 15 March, chancellor Jeremy Hunt announced the intention to abolish the LTA - a move that caught the industry by surprise.
The SPP said the Finance Bill clauses in the so-called L-Day legislation - published on 18 July - gave more detail on how the regime and the legislation would need to be adjusted to allow for the changes, but exactly how this will work in practice is not yet clear.
In a paper published this week, the SPP discussed the potential consequences of retaining the LTA, abolishing it and abolishing and then reinstating it.
The SPP said abolition of the LTA would both remove a barrier to pension savings and also go some way to simplifying pensions - getting rid of things such as complications around various LTA protections.
It said the removal of the LTA could also have some economic rationale - possibly helping remove the barriers around those who have retired early coming back to work or encourage those mulling early retirement to reconsider.
The SPP also said retaining the LTA would also have advantages - noting it was "particularly challenged" by the process changes required by the Finance Bill clauses and adding that retaining the LTA would mean these complex changes would not be needed.
As well as this, it said retention of the LTA would mean that arrangements such as employer-financed retirement benefits scheme and employers paying cash in lieu of pension contributions could continue on their current terms.
Finally, the SPP looked at the consequences of abolishing the LTA and then reinstating it later - pointing to a study by AJ Bell that found some 72% of financial advisers expected that either the policy would never be fully implemented or would be immediately reversed if the government changed.
The SPP said the fear of the LTA being reinstated could lead individuals and employers to hold back from changing their plans.
It added that if reinstatement did happen, it could add an extra layer of complexity if it is decided to offer some form of protection for those who have restarted pension contributions having previously ceased doing so due to concerns about losing protections.
And it asked what would happen if making DC contributions in 2023/24 tax year resulted in the loss of a protection instead?
Finally, the SPP said any move to reinstate the LTA for just part of the saver population - e.g. to exclude only NHS doctors from it - would introduce yet another layer of disparity and is likely to further reduce consumer confidence for the many who will yet again be subject to the restriction.
The paper concluded: "There is an economic rationale for both having an LTA and not. However, the LTA being abolished and then reinstated at a later date will increase complexity for a pension system which is already in dire need of, dare we say it, simplification.
"The cost of abolishing the LTA for schemes is not insignificant; it requires system changes, process changes, updates to member communications, updates to scheme rules and more. The cost of then re-instating the LTA at a later date should not be underestimated, nor should the inevitable complexity of these changes for both schemes and, importantly, their members who may ultimately pay for these changes."