PENSIONSANDSAVINGS.COM

BUDGET 2023 – It’s good news day for pensions!

Chancellor takes brilliant bold decision to abolish Lifetime Allowance altogether.

At last a move that is likely to benefit pensions, reduce complexity and increase employment.

Abolishing Lifetime Allowance and raising Annual Allowance can facilitate more pension assets being invested to boost growth.  

Government pays over £40billion a year into people’s pensions, so makes sense to use some for growth-boosting infrastructure, social housing, net zero and nature preservation investment.

A new era for pensions begins today: The headline grabbing decision by the Chancellor to abolish the pensions Lifetime Allowance is brilliant news for pensions. After so many years of ups and downs, making it impossible to plan the long-term investments suited to pension investing, the Budget has paved the way for a new era.

Limiting both annual contributions AND lifetime fund size never made sense: It never made sense for Government to limit the amount people are allowed to put into their pensions each year AND then punish them if their funds performed too well over time.  Penalising the life time investment growth of the permitted annual contributions has deterred investments in growth boosting small companies and other high expected return projects.  Once the annual amount is capped, it makes no sense to punish strong investment growth.  I believe it is only right to allow people to build as good a pension fund as they can, rather than being frightened of good performance.

The Lifetime Allowance calculations were also damaging to employment: There has been concern for several years that the Lifetime Limit was deterring work, especially for people in Defined Benefit pension schemes, which prevail across the public sector. The existing punitive pension tax rules have been forcing senior NHS doctors to reduce their hours or take early retirement, constraining clinical activity, with numbers taking early retirement more than tripling over the last 13 years.

Abolishing Lifetime Allowance should help reduce NHS backlog: With nearly 7 million people in England already waiting for planned medical treatments, such as cataract operations or hip and knee replacements, it is only right that the Chancellor has taken bold action to stop the exodus of the most senior staff, purely because of pension penalties.

The Lifetime Allowance has been increased, then cut sharply, then cut again and then slightly raised, making long-term pension planning impossible: The value of the Lifetime Allowance started at £1.5million in 2006, increased to £1.8million by 2010, was slashed to £1.5million, then £1.25 million, then £1million and is now £1.073million.  Having so many ups and downs has added needless complexity and deterred long-term investment planning. Abolishing it is a great decision.

Limiting the amount of tax-free cash makes sense to recover tax from higher pensions: The Chancellor has also decided to limit the tax-free cash that people can take from their pensions to the current level of £268,275 and it will not be increased for larger funds. This is sensible to offset the impression that the changes are a massive giveaway to the wealthiest higher earners.

Increasing Annual Allowance from £40,000 to £60,000 will help NHS: The Chancellor’s huge increase in the Annual Allowance means people can now put up to £60,000 a year into their pension, instead of just £40,000.  This takes the allowance above the 2010 level, but still well below the £250,000 limit that prevailed under the last Labour Government up to 2011. This large increase also seems designed to help address the NHS staff shortages, because the penalties for exceeding the Annual Allowance have led to many doctors refusing to take on extra shifts, for fear of suddenly facing tens of thousands of pounds in tax charges.

Increasing Money Purchase Annual Allowance to £10,000 is unlikely to make much difference to the labour market: The Chancellor has also decided to increase the amount that people are allowed to put into their pensions, even after they have taken some income from their funds, from £4000 a year to £10,000 a year. Some commentators think that this will bring retired older people back to work.  I must admit I do not believe this move will make much difference. I have seen little evidence that the restriction of paying more than £4000 a year into their pension, after already having taken some income from their fund in their fifties or early sixties, would deter them from getting back into work and earning an income. I am not sure this is the best way to spend taxpayer money but it was called for by some in the pensions industry.

Abolishing Tapered Annual Allowance could have helped: I would have liked the Chancellor to end the ludicrously complicated restrictions on pension contributions for the highest earners. The rules should have been removed, because the overly complex calculation has frightened senior doctors away from doing extra shifts to help reduce the NHS backlog. The taper does not affect many people and removing it would help simplify the system further.

Plans to unlock pension investment to support growth projects are long overdue: The Chancellor will unveil proposals to unlock more pension investments – especially from Defined Contribution schemes – to help support growth, with announcements later this year. This is long overdue, and ought to apply to Defined Benefit pension assets too. This is likely to require developing pooled long-term asset funds, which can have a wide range of investments in infrastructure, social housing, green growth and nature preservation, which all need long-term capital and can provide good returns over time.

Government pays over £40billion a year into people’s pension funds– why not direct some of this money to help long-term growth projects: Harnessing the power of pension assets can really tackle the UK growth problem and also potentially help regional economies. Given the enormous amount of taxpayer money that is paid into people’s pension funds each year, it seems reasonable for the Government to want to ensure some of this can boost the long-term performance of the UK. I look forward to seeing the plans for how such asset pools will be made available and proposals to tackle the historic emphasis on bonds, rather than higher expected return assets such as equities and small businesses.

Overall this seems like a good news day for pensions at last!