Jeremy Hunt announced plans to abolish the lifetime allowance on pensions in his Spring Budget. This came as a “surprise” to the majority of financial analysts who expected the pension allowance threshold to be raised instead.
What is the lifetime allowance?
This threshold is the total amount someone can put away in their pension savings without incurring a tax charge.
Once an individual goes over the lifetime allowance, they usually have to pay a tax charge at certain times.
For the majority of people, the lifetime allowance comes to £1,073,100 and was supposed to be frozen at this level until the 2025/26 tax year.
However, following the Chancellor’s Budget announcement yesterday, this will no longer be the case.
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Claire Moffat, the head of technical and marketing compliance at Royal London spoke to Express.co.uk about the ramifications of getting rid of the lifetime allowance.
She explained: “It feels a shock. We were expecting the lifetime allowance to increase to £1.8million, so actually having it abolished is a surprise.
“I do think it shows how big a problem it is. The Chancellor mentioned the fact that there are so many people over 50 who aren’t working.
“It really is to encourage these people with all of the skills and experience to encourage them to go back to work.”
The retirement expert broke down who will be particularly impacted by the decision to scrap the lifetime allowance and the wider societal knock-on effect that will have.
Ms Moffat added: “The decision to abolish the lifetime allowance is going to be welcomed by many, especially doctors in the NHS.
“We knew that too many doctors were retiring early to avoid paying the tax charge but it will have an impact on everybody.
“If these doctors are working, it means they can be clearing hospital waiting lists as well.”
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She also noted that while the lifetime allowance will be done away with in 2024, the tax charge linked to the threshold will be removed from April 6 of this year.
This means that even if someone goes over the lifetime allowance, they are not going to have to pay a penalty.
Despite this, there are still restrictions placed on how much people can save for retirement even with the wave of changes, according to the expert.
She said: “Tax-free cash is still going to be limited to 25 percent of what the current lifetime allowance so it’s not like people can take 25 percent of a £2million pot for example.
Among the other announcements made by Jeremy Hunt was the confirmation that the annual allowance will be raised.
The threshold will be hiked from £40,000 to £60,000, meaning households will be able to put more money away tax-free throughout the year.
As well as this, Mr Hunt outlined plans to increase the Money Purchase Annual Allowance (MPAA) from £4,000 to £10,000.
This means those that retired early and returned to the workforce will be able to save more money than before in their pension pot tax-free.