Steven Cameron, Pensions Director at Aegon explains: “It will be really good news for potentially millions of pension savers if the Chancellor announces increases to some or all of three key pensions allowances in the Budget. In his November Budget the Chancellor confirmed the state pension ‘triple lock’ would be honoured this April. This time, here’s hoping for a private pension ‘triple unlock’ of the Lifetime Allowance, the Annual Allowance and the Money Purchase Annual Allowance. It’s now widely accepted that these ‘allowances’, which act as restrictions, can discourage individuals later in their working lives from staying in or returning to the workforce. Any increases to these will be good news and in line with the Chancellor’s aim to get this group off the golf course and back to work. We’re hoping for bold increases as each of the allowances was far higher at some point in the past and if they had been inflation protected rather than cut back by previous Chancellors, much more could have been built up in pensions to provide more comfortable retirements.
“The Lifetime Allowance is currently £1,073,100 and under current rules will stay frozen at that level until April 2026. It was at its highest back in April 2011 when it was £1.8m. Had it increased in line with inflation each year, then from this April it would have been almost £2.5m.
“The Annual Allowance is currently £40,000. It has been subject to the most extreme changes and cuts in previous years. Prior to April 2011 it was £255,000, but was cut back to £50,000 on 6 April 2011 and then to £40,000 in April 2014. Had it been increased each year from its peak in line with inflation, it would now be over £367,000.
“The Money Purchase Annual Allowance currently sits at £4,000 but when initially introduced back in April 2015, was set at £10,000. Had it been increased in line with inflation each year, then from this April, it would have been around £12,700.”
Dean Butler, Manging Director for Customer at Standard Life comments: “The lifetime allowance has become unfit for purpose in recent years and has increasingly caught middle earners who have saved diligently over the years. Extending the allowance to £1.8m would take us back to 2011/12 levels and represents a welcome reversal after years of cuts. The change would represent a major shift in pension policy given the allowance was due to be frozen at its current level of £1.07m until 2026 but a combination of inflation and a desire to keep older people in the workforce looks like it's prompted a rethink. While the current limit may sound substantial, when converted to an inflation-linked annuity it would generate an annual income of around £44,000 to start with and many will aspire to more than this in retirement.
“Increasing the annual allowance by £20,000 to £60,000 is likely to be welcomed particularly by those looking to catch up on the retirement provision or for those with irregular earnings who are relying on making larger contributions later in their careers.”
Becky O’Connor, Director of Public Affairs at PensionBee, commented: “An increase to the Lifetime and Annual allowances will be popular and will restore much-needed incentives for people to prioritise their pensions as they approach their later working years. These limits were always intended to go up but in recent years have been cut, sending completely the wrong signals to people trying to save as much as possible for retirement.
“But it’s hard to see how these moves will get people back to work - once you’ve taken early retirement and worked out this is affordable, it’s unlikely that being able to put more in your pension would encourage you back. In fact, it’s possible that high earners who can maximise these allowances could end up leaving work sooner as a result of the higher limits, as they will be able to build up more, more quickly.
“However it is also possible that the changes could keep older workers who are still in relatively highly paid work working for longer, so they can build up an even more decent target amount and have an even more comfortable retirement.
“If someone has given up work early due to ill health before managing to build a decent private pension pot, then these measures are irrelevant - if you can’t work, you can’t work. Equally, for people on low or moderate incomes who are only paying the minimum into their pensions, the Annual and Lifetime allowances are less relevant anyway, as they are probably not likely to hit either of them, even at the current levels.
“What could be more effective in enticing any retirees back to work - whether they’ve retired early or not and whatever their income levels or reasons for wanting to give up work, is increasing the availability of part time, flexible work. This would give older people who need to carry on working more options, as well as those who simply want to carry on working to keep interested and active.
“Raising the Money Purchase Annual Allowance from £4,000 to £10,000 would also be welcome. It limits what you can contribute to your pension once you start to take an income from it. This will help people who may have needed to dip into their pension pots before officially retiring, but who still need to keep building up their pension before fully giving up work.
“With these measures, it looks increasingly likely that the Chancellor is preparing the nation for a higher state pension age. Increasing it sooner from 67 to 68, as is now on the cards, could potentially hit people now in their late forties and early fifties - this group will need as much help as they can get to build up their private pension pots by enough to keep their dream of retiring before the State Pension age alive.”
According to a survey by PensionBee, a majority of pension savers (64%) feel the Annual Allowance should rise in line with inflation.
This view was most consistently held by those over the age of 55 (66%), who are at, or close to, retirement age. Over a third of respondents (37%) said they would like to see the Lifetime Allowance unfrozen.
PensionBee identified a ‘Pre-State Pension Gap’ of more than £130,000 in total retirement income for someone who wants to retire at 60 rather than 68, the proposed new State Pension age, with a moderate living standard. This would require additional pension savings of around £150,000, on top of what a typical worker would have saved by this point.
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