Changes to Lifetime Allowance (LTA) – could your pensions savings be impacted?

As we approached the March 2021 Budget, the Lifetime Allowance was set at £1,073,100 and it was expected to increase in line with CPI (0.5%) or in monetary terms £5,800 for 2021/22.

However, as the Budget approached there was wild anticipation as to what the Chancellor, Rishi Sunak, would introduce in an attempt to recover some of the money that has been borrowed over the previous 12 months to provide stability to the UK economy during the Covid-19 pandemic.

On 3 March 2021 the Chancellor announced that there would be a freeze on the LTA until April 2026 and the expected increase for 2021/22 was cancelled. The Government calculated that this would result in a saving of £1bn over this period.

As a result of the reductions from the high point of £1.8m in 2010/11 (when it was felt that relatively few people would be affected) to the current level of £1,073,100, then add the rises in wages and the stock markets, it now means that an increasing number of people are finding their pension savings may be impacted by this reduction in LTA.

After this announcement, the Chair of the British Medical Association (BMA) Pension Committee requested that the Government reconsider this freeze and quoted a previous BMA survey of 6,170 GP’s and hospital doctors from 2019 where 31% confirmed that they had reduced their hours due solely to pension tax changes and that 57% were considering early retirement for the same reason.

Annual Allowance

In addition to the LTA there is also the Annual Allowance (AA) which relates to the amount that you can pay into a pension annually and receive tax relief on, subject to your level of earnings. The Annual Allowance is currently set at £40,000 but to add some additional complication we have the Tapered Annual Allowance which would see an individual with adjusted income of £312,000 or more being restricted to a reduced annual allowance of only £4,000.

There is an opportunity to make a pension contribution in excess of the Annual Allowance, but this will involve a calculation and takes into account the un-used allowances from the previous three years.

While we can all accept that the Government needs to make savings so that they can start to repay the huge debts that have built up as a result of the Covid-19 stimulus packages, as individuals we also need to take responsibilities for our personal financial decisions.

A recent headline in The Times said:

As the squeeze is put on many tax reliefs, wealthier investors are piling into risky trusts that offer other perks ….

These include VCT’s (Venture Capital Trusts) & EIS’s (Enterprise Investment Schemes) which both offer 30% tax relief but come with added risks and no guarantee’s – a Blog for another day perhaps but the point is this….

In an ever-changing financial environment, there has never been a time where professional advice was needed more.

The LTA at a glance

In December 2002, the then Government proposed to radically simplify the pension tax rules. The intention was to sweep away the eight pension tax regimes existing at that time and replace them with a single lifetime limit on the amount of pension savings that could benefit from tax relief. **

On 6 April 2006 (A-Day), this lifetime limit came into force in the form of the Lifetime Allowance (LTA). Initially set at £1.5m and rising to £1.8m over the following 5 years, it was intended that this would continually increase over time and it was expected that it would affect relatively few people.

However, in the 2012/13 tax year the LTA was clearly considered too generous and after review it was reduced back to £1.5m and by 2016/17 the LTA was set at £1m but with an agreement that it would then be increased annually in line with CPI.

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** while tax relief may still be available it may result in an additional tax charge and this should be discussed with a tax specialist

The Financial Conduct Authority does not regulate tax advice.