Reading the small-print on pension changes
Chancellor Jeremey Hunt announced in his Spring Budget that he plans to scrap the Lifetime Allowance and increase the Annual Allowance. This is primarily with the intention of stemming the flow of Senior Doctors taking early retirement. Most Financial Advisors and indeed many of their clients were rubbing their hands with the glee at the prospect.
Unfortunately, as is so often the case with headline-grabbing changes, the devil is in the detail!
Firstly, the primary legislation needed to enact the proposals isn’t yet in place.
Secondly, within 24 hours of the announcement, the Labour Party committed to repeal the bulk of the new legislation. That is, if they win the next General Election which we believe will fall on December of next year.
Limits on tax-free cash
Then there is the detail. The proposed changes won’t remove the limit on the amount of tax-free cash individuals can take from their pension assets during their lifetime. The limit remains at the greater of 25% of the current Lifetime Allowance (an amount of just over £268,000) or 25% of the individual’s personal Lifetime Allowance if higher. For example, an individual who registered successfully with HMRC for Individual Protection 2014 (which provides a personal lifetime allowance of £1.5m) should still be able to draw tax-free cash from their pension assets during their lifetime of £375,000. A large sum admittedly but not unlimited, sums taken in excess of this amount could still attract a 55% charge.
It is therefore vitally important that individuals who hold certain types of protection, in particular Fixed Protection, DO NOT restart making or receiving pension contributions. Otherwise, they will likely lose their higher entitlement to tax-free cash in the future.
Also, anyone reaching their 75th birthday during the course of the current 2023-24 tax-year will still have to complete Lifetime Allowance related paperwork and value their pensions assets. This is even if they are well below the current Lifetime Allowance.
Finally, the decision to increase the Annual Allowance to £60,000 from £40,000 previously, in some cases may still result in senior highly paid public sector workers (such as medical Consultants) being subject to an Annual Allowance charge (income tax at their marginal rate). This is because they are, in almost all cases, unable to control the value of their pension contributions in any given tax-year.
What to do next
It therefore remains as important as ever for individuals to seek professional advice from a whole-of-market and ideally fee-based pension specialist before taking any action in regard to pensions.
This is especially advised in cases where individuals are considering either paying money into pensions or taking money out (especially pension income) for the first time. Most such pension decisions are irrevocable and without advice the tax consequences can be severe and irreversible.