CHANGES TO THE LIFETIME ALLOWANCE

WHAT’S CHANGED? In a bid to temper the Treasury’s burgeoning debt pile, the Chancellor’s Spring Budget was expected to contain some elements of restraint amongst the multitude of handouts to rescue the economy. However, the new breed of Tory voters, formerly known as the ‘Red Wall’, would not take kindly to any inkling of austerity after being shattered by post-financial crisis cuts to services and benefits. While austerity is not back on the menu, the Chancellor needed some ammunition to offset his unprecedented relief packages, and in that arsenal, he has opted for the wealthy.

Bad news for high earners (particularly those looking to retire soon), the lifetime allowance on pensions has been frozen until the 2025/26 tax year, and for those concerned about their contributions tipping over the edge, it might be time to consider some alternatives.

As it stands, the limit on total pension savings that a person can accumulate over their lifetime (well, shielded from tax at least) is £1,073,100. In usual fashion, savers were expecting this to increase in line with current consumer prices index (CPI) inflation, which would have given an additional £5,800 this year and further increments over the next five years. However, people who were planning in line with this guidance, will need to review their contributions; a breach of the lifetime allowance can trigger a hefty penalty of up to 55%.

SO, WHAT ARE THE OPTIONS? An obvious solution is to plan current contributions so they can be matched accordingly with the expected limit. Of course, this is not going to work for those looking to put the maximum allowance under a tax-exempt wrapper. It is worth considering that pension pots are assessed by HMRC at the time you start taking, or drawing down, your pension, and then again at the age of 75. So, investors with a decade or so to invest or so can perhaps follow their plan as they were and consider the impact at a later stage. After all, a pound invested today is likely better than in five years. At the same time, pensioners will need to monitor the management of their pension around the 75 age limit, to ensure their investment strategy has not performed so well that it breaches the threshold… a nice problem to have, but pensioners may consider drawing down some of this pot early if this looks likely.

For those closer to their drawdown event it is worth considering utilising annual ISA allowances to supplement retirement income. An extra £20,000 can be used per individual to invest tax free and no additional limits once invested.

While austerity is not back on the menu, the Chancellor needed some ammunition to offset his unprecedented relief packages, and in that arsenal, he has opted for the wealthy.