Picture by Andrew Parsons / No 10 Downing Street
Speculation that chancellor Jeremy Hunt will use this week’s Spring Budget to unveil significant increases in pension allowances have intensified – with some reports suggesting the £1m lifetime allowance (LTA) could increase to as much as £1.8m.
On Friday (10 March), the Daily Mail said Whitehall sources had confirmed the LTA would see the first substantial increase for a decade - adding that the £40,000 cap on annual pension contributions would also be raised.
Today (14 March), the BBC reported that Jeremy Hunt would increase the LTA to as much as £1.8m, and was also expected to increase the AA to as much as £60,000.
The Times also said the chancellor would boost the allowance on tax-free to £1.8m, taking it to the joint highest level on record - adding that nearly two million people would benefit from the move as Hunt seeks to address concerns that allowances are driving doctors and other professionals into retirement.
The Financial Times also reported the move - adding the move was designed to tackle fears that the current allowances are compelling many professionals, particularly doctors, to retire in their fifties, an issue it said has become more acute since the government announced a six-year freeze on the annual and lifetime allowances in 2020.
The Daily Telegraph has also reported on the issue - saying the new LTA threshold may be over £1.5m.
Reports also suggested the money purchase annual allowance (MPAA) could increase from its current level of £4,000 to £10,000 although were less certain whether this would be implemented or not.
The LTA was originally set at £1.5m when it was introduced on A-Day in 2006. It gradually rose to £1.8m in 2010 but fell to just £1m in 2016. Upratings since then have seen the LTA grow to £1.073m.
The AA was originally set at £215,000 in 2006, rising to £255,000 in the 2010/11 tax year before being cut back.
Pensions annual allowance statistics from HM Revenue and Customs (HMRC) show the extent of the issue facing higher earning professionals such as doctors.
Its data showed that over 66,000 individuals reported pension contributions exceeding their annual allowance in the 2019/20 tax year - up from just 4,440 in 2012/13.
HMRC said the total value of allowance charges reported by the scheme through the accounting for tax returns scheme was £253m in the 2019/20 tax year compared to just £14m in 2012/13. It said the pension contributions exceeding the annual allowance reported through self-assessment rose from £95m in the 2012/13 tax year to £1bn in 2019/20.
Welcome move
Pensions and Lifetime Savings Association director of policy and advocacy Nigel Peaple said: "The pensions tax relief system provides crucial support for people by boosting their savings over the long term. Increasing the LTA, the AA and the MPAA should encourage older, often highly experienced and skilled workers, to stay in the workforce. It would also provide more flexibility for retirees to re-enter the world of work and allow additional scope for savers to contribute lump sums into their pension to meet any shortfalls before they retire. If the amounts being quoted are enacted in tomorrow's Budget, they will return the allowances to closer to those originally envisaged before the global financial crisis of 2008."
Lane Clark & Peacock (LCP) partner and former pensions minister Steve Webb said such "jaw dropping" changes to pensions tax relief limits would be a real game-changer.
He said: "If these rumours are true, these jaw-dropping changes could be a game-changer for those who are currently limited when it comes to saving into a pension. Up to two million people who have already breached LTA limits, or could expect to do so, will now find it worth exploring saving more into a pension.
"A big change could also remove some of the complexities of the system, as those who had previously locked into the LTA at £1.5m or £1.25m on condition of no further pension saving would be free to save more. The changes could also be a windfall for those with large pensions on the brink of retirement, who would now pay far less tax when they access their pensions."
Webb also forecast a "boom" for the financial advice sector.
He explained: "Financial advice firms will be cancelling all holidays for their advisers as they will face a surge in demand following the Budget. In addition to the normal rush of activity to meet the 5 April deadline, this year people may be looking to review their pension savings plans not just in future years but even in the current financial year. We are likely to see a surge in interest in saving more for a pension and pension providers may also need to gear up to deal with the increased demand."
Standard Life manging director for customer Dean Butler said the LTA had become "unfit for purpose" in recent years and had increasingly caught middle earners who have saved diligently over the years.
He said: "Extending the allowance to £1.8m would take us back to 2011/12 levels and represents a welcome reversal after years of cuts."
Butler added: "Increasing the annual allowance by £20,000 to £60,000 is likely to be welcomed particularly by those looking to catch up on the retirement provision or for those with irregular earnings who are relying on making larger contributions later in their careers."
Aegon pensions director Steven Cameron was also positive about the possibility of pension allowance reform. He said: "It will be really good news for potentially millions of pension savers if the chancellor announces increases to some or all of three key pensions allowances in the Budget.
"In his November Budget the Chancellor confirmed the state pension ‘triple lock' would be honoured this April. This time, here's hoping for a private pension ‘triple unlock' of the LTA, the AA and the MPAA."
TPT Retirement Solutions DC director Philip Smith also said the decision to raise the LTA and AA would be welcome news.
He said: "At the previous level, the lifetime allowance was beginning to affect increasing numbers of highly skilled employees who we need to keep in the labour market.
"For defined contribution (DC) savers, who face the challenge of providing long term sustainable income from their retirement pots, the ability to work longer and save more will give many the opportunity to build greater retirement security whilst remaining economically active and contributing to the UK's economic success."
