The chancellor Jeremy Hunt has abolished the lifetime allowance in a bid to stop people ‘pulling out of the workforce for tax reasons’.
There had been excited media speculation in the days before the Budget that the lifetime allowance, currently set at £1.073m and due to remain frozen until 2026, would be increased to its former 2010/11 high of £1.8m. However, in a move which caught many by surprise, he announced its removal altogether. The tax charge has already been removed and a Finance Bill next year will abolish the lifetime allowance fully from April 2024.
However, one negative issue is that the maximum pension commencement lump sum (your tax-free cash when pension benefits are drawn) will remain at the level of £268,275 (25 per cent of the current lifetime allowance figure of £1.073m). This will not apply if individuals have previously applied to ‘protect’ a higher level of tax-free lump sum. For many, this means that although they will be able to build greater levels of pension savings, a greater portion of those savings may be subject to income tax.
Furthermore, the removal of the lifetime allowance does not mean those that have been opted out of the pension for a reasonable period should automatically start contributing again. This is because inflationary increases, which will have been accrued at no cost as a deferred member, will be lost on re-entering the scheme for some members.
The optimal time to take pension benefits can also vary significantly between pension schemes and mean the difference of thousands of pounds. Coupled with the new NHS retirement flexibilities, which mean members of the 1995 scheme can also access one pot and continue to the other, knowing when it is best to draw from each of them is more complex than ever.
Knee jerk decisions should, as always, be avoided, and although these changes are positive and welcome, everyone’s circumstances are different. There is rarely one size that fits all and seeking advice is paramount.
Tax treatment varies according to individual circumstances and is subject to change.
Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 18/04/2023