One of the least unexpected parts of a Budget, most of which had been flagged up in advance, was tackling the LTA. But has the Chancellor blown up a good idea by going too far?  By Tony Watts OBE

One of the major headline announcements of the recent Budget was the scrapping of the lifetime allowance for private pensions, effective from April 2024. But perhaps the headlines that the Chancellor received weren’t as positive as he might have been hoping for. The announcement was seized upon by columnists and opposition as a step too far, and an unnecessary “bung” to the very wealthy.

Consequently, the measure’s future is in doubt, as Labour has already promised to unpick it just as soon as they get into power.

And that uncertainty is precisely what is not needed, not least for the professionals it was supposedly intended to dissuade from taking early retirement: doctors.

The allowance of course (currently just over £1 million) is the maximum that an individual can build up in all their pension savings without incurring a tax charge. To many people that already sounds like a lot of money… but for higher earners it really isn’t, once you apply a conservative 4% or 5% annual return on that pension pot. When Labour introduced the LTA in 2006 it was at £1.5 million – and annuity rates then were around the 7% mark. That equated to an annual income in retirement of £100,000, worth around £160,000 in today’s money.

It’s worth remembering that this only became an issue following successive cuts in the LTA under recent administrations: it really has been a self-inflicted wound, which absolutely needed to be rectified. It has undoubtedly led to many people squirreling their money away into other investments, not least buy-to-let… arguably helping to fuel the rise in property prices.

Annuities uncertainties

And, of course, it has had the perverse effect of encouraging some highly-paid workers to take early retirement, leading to staffing problems for the NHS and other professions.

At the moment, we are seeing some exceptional returns on annuities, which for some time have lain in the doldrums. But that might not last for too long as inflation is predicted to fall in the medium term, and with it, interest rates. Anyone considering whether to retire now or carry on and put more money into their pension pot, might well be tempted to cash in their chips… especially if the LTA is going to be reintroduced in a year or two’s time anyway: the very reverse of what the measure was intended to achieve.

Wouldn’t it have been sensible to have simply put the LTA up by a meaningful amount and left it at that? The market was expecting £1.8m, but the Chancellor could certainly have argued for, say, £2 million or even £2.5 million. He could even have increased the annual allowance to encourage higher earners nearing retirement to remain in work for longer. It would have targeted the very people he was supposed to be targeting and not caused the uncertainty we now have… and if there’s one thing that everyone planning their retirement finances wants, it’s certainty.

As it is, the abolition of the LTA has now been put in the ‘’too difficult pile’’ for the Budget Finance Bill and a second Bill is being drafted for Parliament to debate in the Spring / Early Summer.

Allowance protection

When we get the details, there may be some movement in the new limit on the maximum tax-free cash that can be withdrawn (which is now fixed at £268,275 unless a higher figure has been protected). Lobbying has already started that this new limit should at least be increased annually by the rate of CBI…. and this leads on to the matter of “lifetime allowance protection”.

There is, it should be said, an established precedent of Government introducing the ability to predict a higher level of lifetime allowance when a new lower level is introduced. Such protection prevents retroactive taxation – and even the Labour party might not want to be seen the harbinger of retroactive taxation.

So there’s a school of thought that says make hay… and take advantage of the new rules; and the contrary thought of do nothing and possibly miss the boat!

One thing’s for sure: pension regulation has been booted into the centre of the political spectrum and is certain to be a much-contested feature of the next Election

And you can check out whether your financial plans are on track using the RetireEasy LifePlan, available here: https://www.retireeasy.co.uk/