In a bid to highlight the importance of saving to the UK people, in this afternoon’s UK budget, Jeremy Hunt, the chancelor of the exchequer, announced an increase in the pensions annual allowance from £40,000 to £60,000 and the abolition of the lifetime allowance (LTA), which is expected to promote working for longer.
Also, as a result of the pensions tax measures announced today, an estimated 80% of National Health Service (NHS) doctors will not receive a tax charge with respect to accruals under the 2015 NHS career average scheme.
Matthew Arends, head of UK retirement policy at Aon said that with the LTA scrapped, people can save without the need for elaborate tax planning.
He exemplified: “For people with [defined contribution] savings, a pension pot of the current LTA of £1.07m equates to an annual pension (after tax) of around £37,800 – broadly equivalent to ‘comfortable’ under the PLSA’s Retirement Living Standards, and less than ‘comfortable’ for anyone living in London. Without the concern of working around this artificial, tax-driven ceiling people can simply save as much as they can to support their old age as comfortably as they can.”
Arends noted that this was “especially good news for the next generation of private sector pension savers – Generation X – the majority of whom have had limited access to final salary pensions and who are now within 10-15 years of their potential retirement date”.
According to data by consultancy LCP, there is an estimated 1.5 million non-retired people that 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.
Catherine Pearce, associate partner Aon, said that due to the way the calculation works for defined benefit (DB) schemes, there have been more and more Local Government Pension Scheme (LGPS) members affected by an annual allowance breach even after a relatively modest pay rise.
”With the combination of the increase in the annual allowance and the recent change to the date revaluation is applied in the LGPS, we now expect far fewer LGPS members to breach the annual allowance,” she said.
Little difference for Middle Britain
But for ‘Middle Britain’ the abolition of the LTA and the additional annual allowance “will make little difference,” said Stephen Lowe, group communications director at retirement specialist Just Group.
For high earners the extra annual allowance will be useful and it may also help those later in life who find they need to save significantly extra to bolster their pension pot ahead of retirement, Lowe said.
However, he added: “The removal of the lifetime allowance releases people to save as much as they like but for many it will be irrelevant, as the chancellor himself indicated the obvious winners are doctors in the defined benefit NHS pension scheme.”
Phil Brown, director of policy for People’s Partnership, provider of The People’s Pension, agreed.
“At a time when the NHS is facing significant challenges, any measure that encourages valued and experienced doctors to continue working is to be welcomed, but today’s announcement on the lifetime allowance and annual allowance will do nothing to solve the problem of under-saving in the UK.
“These changes to the pension allowances won’t impact the vast majority of hard working savers and means very little to the millions of people who save through automatic enrolment. Reform to workplace saving will be the only way to ensure that millions more people can save enough to live on in retirement.”
Sara Cook, president of the Pensions Management Institute (PMI), welcomed the measures affecting workplace pensions announced in today’s budget. However, she highlighted that Hunt’s decision to abolish the LTA did not take inflation into account.
“Having abolished the LTA, the government could have [also] abolished the tapered annual allowance (TAA), which continues to be unpopular throughout the pensions industry and also among the general public,” she said, adding that the tax revenues gathered through the TAA must now be so small that its retention seems hard to justify.
“The Chancellor has missed an opportunity to abolish a measure that has few admirers,” Cook said.
Jonathan Seed, head of pension strategy at Cartwright, noted: “It’s not just those close to retirement – all individuals who think they could be affected now or in the future should take advice. Ultimately, decisions around pension saving are the individual’s responsibility!”