A recent survey1 has revealed the dramatic impact that Chancellor Jeremy Hunt’s decision to scrap the pension Lifetime Allowance (LTA), made several months ago, is having on people’s retirement planning.
In his first Spring Budget Statement delivered on 15 March, the Chancellor announced that the LTA charge would be removed from April 2023 and that the LTA would be abolished altogether from April 2024. The decision was designed to remove a disincentive for retirement saving amongst higher earners and also dissuade an increasing number of this group from retiring early.
Boosting pension contributions
The research suggests the change has already had a significant impact on higher earners’ pension saving and retirement planning decisions, both in terms of encouraging more pension contributions and persuading people to delay their retirement. According to the survey, 51% of higher rate taxpayers have restarted, increased, or plan to increase their pension payments since the announcement, with average additional payments amounting to £650 a month.
In addition, 23% of respondents said they had delayed their planned retirement or are likely to do so because they can now save more into their pension pot without facing a heavy tax charge later. Around 10% said they had come out of retirement as a result of the change, while another 6% were planning to rejoin the workforce.
Advice is key
The abolition of the LTA – while positive for many – does add some complexity to the system, particularly around when to take your tax free cash. The threshold for the maximum amount of tax free cash that can be withdrawn from a pension was also frozen by the Chancellor at £268,275, so this needs to be considered if your pension pot is at or above the old LTA threshold.
Not to mention the risk that the decision could be overturned by future governments. Professional financial advice is therefore key to navigating these complex decisions.
Tax treatment varies according to individual circumstances and is subject to change.
1Investec, July 2023