Fidelity International’s James Carter that, even without the LTA, the pension taxation system is complex and subject to tinkering
In the Society of Pension Professionals’ (SPP’s) latest column for Professional Pensions, the organisation cites the abolition of the lifetime allowance as an example of why we need simplification as well as longer-term stability in pensions.
Back in March, the chancellor surprised us all with his announcement to abolish the lifetime allowance (LTA). We expected a change but not its complete removal. The abolition is intended to encourage people over 50 to remain in work or come back to work, with a particular focus on key sectors including the NHS where it had been reported as a barrier to retaining doctors.
Whilst removing the LTA has economic rationale for the chancellor in his ambitions to retain people and skills in the workforce, the need for the LTA has long been questioned from a pension policy perspective.
For defined contribution (DC) pensions, as is the predominant type of active pension provision, the LTA penalises good investment returns when there is already an annual limit on tax-efficient saving. With the annual allowance having been reduced so far since 2006 the LTA had become unnecessarily punitive and distorting. Its removal could go some way to simplifying pensions for consumers.
However, the LTA is weaved throughout much of the pensions taxation system, as anyone who has been involved in considering the impact of removing it will know.
Even the removal of the LTA charge for this current tax year presented numerous challenges and certainly isn't simplifying pensions for anyone in the short term - and there is much work to be done to analyse and plan for the removal of the LTA from 6 April 2024. We hope to quickly see a building of activity and momentum through the industry group working with HMRC to consider the issues. Moving from the current state of a zeroed LTA charge to the LTA's removal will relieve much complexity and burden from both pension scheme members and administrators.
Coupled with all of the uncertainty around how the removal of the LTA itself will work, there is also the risk that a Labour government would reinstate the LTA. That uncertainty is not good for consumers, as differing narratives pervade through industry communities as to the wisdom of maximising pension input and acting to invalidate any LTA protection that an individual may have in place.
What is needed is longer-term stability from undertaking a proper review of the pension system so consumers can plan effectively.
With increasing dependence on DC pensions at retirement, state, workplace and private provision need to be considered in tandem to create a secure future for the UK's older generations and the generations that will come after them.
Even without the LTA, the annual allowance, the tapering for the highest earners and the money purchase annual allowance (MPAA) all continue to feature in a complex pension taxation system which may continue to be subject to short-term tinkering.
Long-term stability in pensions is vital, and simplifying the system is essential to increasing engagement and giving consumers confidence in pensions.
James Carter is a member of the Society of Pension Professionals and head of pension product and policy at Fidelity International
