This year’s Budget has baffled me more than most. I still cannot get my head around why a seemingly highly conservative Chancellor Jeremy Hunt threw out a decade of pensions taxation policy and effectively said “to hell with it.”
Scrapping the LTA, and significantly increasing other pensions saving allowances such as the Annual Allowance by 50% to £60,000, is the work of a radical Chancellor. I’m beginning to wonder if we have a secret radical in our midst.
Behind the calm and controlled exterior could there be lurking a Chancellor who wants to take a few risks? Who wants to axe long established conventions?
Interestingly, it was his boss who, in 2021, put in place a five year freeze on tax thresholds, including freezing the LTA at £1.073m until at least 2026. This week Mr Sunak warmly applauded a Chancellor who reversed part of a policy he put in place only two years ago. Anyone suggesting a lack of consistency in pension policy may well have a case to argue.
The implications of the LTA axe, and other pensions changes, are slowly being absorbed by the industry experts and I have no doubt will open all sorts of new and lucrative avenues for planners and their clients.
One obvious change is that the better off, and those who have already retired, will be encouraged to save a lot more in pensions to enjoy the exclusive tax benefits they offer. Pensions providers will be rubbing their hands although this does not avoid the fact that many people lower down the income brackets are cutting the amount they save in pensions just to keep the lights on.
The scrapping of the LTA will have other benefits including opening up significant IHT mitigation potential. Pensions pots are not normally subject to IHT when passed on so why not stuff your cash into a pension instead? There could be all sorts of other tax saving benefits.
One thing is clear, however; if Mr Hunt wanted to scrap the LTA his timing is good. With more people being hit by the LTA – some 42,350 in 2019/20 faced LTA tax penalties – the tax tax from the penalties was set up surpass £1.5bn by 2025. Relatively small beer for the Treasury but as the sum increased it would have made it more difficult to forego this revenue. Those hit by penalties will thank him too.
Many doctors and high earners who had breached the LTA will be equally grateful. They can carry on pension saving without fear of penalty and that may keep a few working for a bit longer. A few more doctors in our hard-pressed hospitals is no bad thing.
I suspect a bigger benefit will for the many thousands who have a pension pot approaching the LTA who have either sought protection or decided to put their money elsewhere, into an ISA for example. Many of these will be pleased that they too can now put more into their pension.
Of course there is always a sting in the tail when something seems too good to be true. Firstly, Mr Hunt changed the rules on pension tax free cash. Instead of capping it at 25% of the fund he has now moved it to £268,275, effectively introducing a new pensions cap (I said he was radical). Ostensibly he did this to stop the tax free cash being virtually unlimited but this is a strange move that needs further consideration. It may not be a positive move long term.
The other sting comes from Labour which has promised to reverse the LTA axe if it comes to power. This helps to differentiate Labour on pension policy but it could potentially cause a huge furore in pensions down the line. The implications have yet to be fully understood but this could undermine the LTA axe. Labour needs to clarify its policy and soon.
So where do I stand on all this? I’m in favour of pension saving so anything that encourages it is a good thing in my book, even if it’s mostly the better off who will benefit. It’s wrong to say just the very rich will benefit, however. Many managers and executives in companies, hard working ordinary people, will have built up a pension pot of £1m after decades of slog so giving them a retirement boost is fine in my book.
What will be more important is what happens next. If the new pension changes are just an excuse for some huge rounds of tax dodging they will lose public favour very quickly so the pensions sector needs to handle the changes with care to ensure as many benefit as possible.
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Kevin O’Donnell is editor of Financial Planning Today and has worked as a journalist and editor for over three decades.