Chancellor Jeremy Hunt has abolished the pension lifetime allowance and increased the annual tax free pension allowance by 50 per cent to £60,000 a year.
The measure was one of several unveiled in the Budget and aimed at encouraging an estimated 3.5m people of pre retirement age back into the workforce.
Hunt said: “Turning 50 is a moment of anxiety rather than an anticipation of two decades of fulfillment.”
Mr Hunt is keen to bolster Britain’s workforce as he looks to deliver on the Prime Minister’s pledge of growing the UK’s stalling economy.
The lifetime allowance was £1.07m, with savers incurring tax after that personal pensions pot threshold has been exceeded.
Hunt also increased the annual pension allowance which is the amount tax free UK taxpayers can put towards their retirement in any one tax year. It was £40,000 and is now £60,000.
The money purchase annual allowance (MPAA) has also been increased from £4,000 to £10,000.
The abolition of the lifetime allowance has been largely welcomed by the pensions industry.
Martin Gilbert, Chairman of Toscafund and AssetCo, said the removal of the LTA on pensions was, “tremendous news for the economy”.
He said: ” It means that skilled older workers, particularly in the NHS, will be incentivised to stay in employment or even return to work so they can save for their old age in a highly tax efficient way. We need older workers in the economy to pass on their skills and experience to their younger colleague. The LTA should never have been reduced to the current level, so the current Chancellor’s decisive action to address the issue should be broadly welcomed.”
David Stevens, retirement director at LV=, said: “Scrapping the lifetime allowance (LTA) and increasing the annual allowance will be welcomed by pension savers throughout the UK .
“The freeze to CPI rises in the lifetime allowance (LTA) from April 2021 had disappointed many savers and many people will be celebrating the Government’s announcement to scrap the LTA. It penalised good investment decisions and removing it will simplify a complex pensions tax system.
“The increase to the annual allowance (AA) to £60,000 is also the first since April 2010, but it is still significantly lower than its previous highest amount of £255,000 12 years ago.”
Alec Collie, head of medical at the Wesleyan Group, a specialist financial services mutual for doctors, teachers and dentists, said: “From a tax perspective, this budget is just what the doctor ordered.
“The risk of punitive tax charges – primarily from exceeding the annual allowance – has led to some of our most experienced doctors leaving the National Health Service, reducing their hours or dropping out of the NHS Pension Scheme and forfeiting their own retirement saving opportunities. It’s also stung some of the longest serving teachers and dentists. These are problems we’ve been highlighting for some considerable time, and we’re glad the government has taken action.
“Our research has shown that a fifth of doctors have already left the NHS pension scheme as a result of these tax issues. There is an option for them to re-join but they should seek professional advice to understand the specific implications.”
David Stevens, retirement director at LV=, said that increasing the MPAA to £10,000 was good news for retired people returning to work.
He said: “Last year the Government announced a drive to coax those aged 50 and over to re-join the jobs market. However, many of these early retirees will have flexibly accessed a pension and would have been stung by a money purchase annual allowance tax charge after returning to work.
“A quarter of savers over 55 contributed more than £4,000 to their pensions in 2020/21. Increasing the limit back to £10,000 will help over 55s to return to work, navigate the cost of living crisis and boost the economy, without the risk of been hit by complicated and unfair tax charges as a result of auto-enrolment. “
Some experts argued the chancellor could have done more to help encourage pension saving.
Lily Megson, policy director of My Pension Expert, said in the year leading up to April 2020, only 42,350 breached the allowance.
“The chancellor missed an opportunity to help people of all wealth brackets. Looking beyond the figures, it’s disappointing not to see wider support – like improved access to pension information or affordable independent financial advice – being provided to those who need it. No one should feel the need to return to work because they feel pressure – from the government or otherwise – to do so. Going forward, I certainly hope to see the government put such mechanisms in place to empower savers to first weigh up all options and decide whether returning to work is the right move for them.”