Some people will have stopped saving into a pension altogether in order to avoid breaching Lifetime Allowance (LTA) limits, whilst others will have seen their annual pension saving limited by the Annual Allowance (AA), the potentially much lower ‘tapered’ AA, or the Money Purchase Annual Allowance (MPAA) which restricts pension saving for those who have already drawn taxable cash from a ‘pot of money’ pension.
A key point is that people who held off saving in the last few years because of fears over Lifetime limits will be able to *carry forward* up to three years of unused annual allowances to increase the amount they can pay in.
The major changes which will provide a boost to saving include:
• The Lifetime Allowance will be abolished – instead of being frozen until at least 2026; this will immediately free up two groups:
Those who had stopped saving in anticipation of breaching the LTA, especially because of the plan for the LTA to be frozen for several more years;
Those who had previously locked in to ‘Fixed Protection’, following the cut in the LTA from £1.8m to £1.5m in 2012, the cut to £1.25m in 2014 or the cut to £1m in 2016; this group was able to lock in to the previous (higher) LTA on condition of doing no new pension saving but will now be freed up to save more; around 100,000 people have Fixed Protection for 2012 or 2014 or 2016 and can now save without breaching LTA limits, though scope for doing this in practice will depend on the Annual Allowance;
• The general Annual Allowance will rise from £40,000 to £60,000 – this change will be particularly beneficial for those in final salary pension schemes who can sometimes face a big tax charge if they are getting high value accrual or indeed if they get a promotion or other boost to the value of their pension in a single year;
• The ‘tapered’ Annual Allowance rules will change so that even the highest earners can put in up to £10,000 rather than £4,000 at present;
• No change in the AA carry-forward rules – so scope to look to the past three years of unused AA to support making current savings;
• The Money Purchase Annual Allowance will rise from £4,000 to £10,000, benefiting mainly those aged 55+ who have tapped into a DC pension but are now trying to build up their pension savings again.
The exact numbers in each group are not known, but LCP has estimated that over 1.5m non-retired people are either already over the LTA or could have expected to be so based on the previous policy. The majority of these will now be free to save more. Including those able to save more following lifting of the AA and MPAA it is estimated that at least 2 million people will now be freed to save more into a pension as a result of the Budget.
Commenting, Steve Webb, partner at LCP said: “For more than a decade we have seen a series of big cuts to annual and lifetime limits to pension tax relief, resulting in large numbers of people being unable to save more into a pension without incurring an extra tax bill. The Budget represents a sea-change in government policy and will set millions of people free to save more into pensions. We are likely to see a ‘flood’ of new money into pensions from higher earners. There will be an urgent need for such people to take financial advice to make sure that they are best placed to take advantage of the much more positive regime which has just been introduced – perhaps even before the start of the coming tax year and the new regime.
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