Pensions tax free cash will be capped at £268,275 despite the scrapping of the pensions Lifetime Allowance (LTA).
The pensions Lifetime Allowance will be scrapped from the new tax year.
The Chancellor had been expected to increase the LTA from £1.07m to £1.8m but instead chose to scrap the LTA completely in his Budget today.
The move, in theory, means people can build pension pots as big as they like however some restrictions remain.
The Chancellor said scrapping the LTA would encourage more workers to work for longer or return to work if they had retired early.
However some limits will still apply. The amount people can take tax free from their pension pot, usually 25% of the fund, will be limited to £268,275.
Some experts said the move suggests the Chancellor will act to stop any abuses of the new pensions regime.
In a set of major pension saving reforms today, the Chancellor also announced he would increase the annual pensions saving allowance from £40,000 to £60,000 and bump up the Money Purchase Annual Allowance (MPAA) from £4,000 to £10,000.
In doing so the Chancellor reversed a long running policy by the Treasury to cut pension saving allowances.
Andrew Tully, technical director at Canada Life, said: “This is a seismic change to the pension tax landscape, reversing a decade of declining lifetime allowance which discouraged higher earners from saving. However tax-free cash will be limited for most people to the current maximum level of £268,275. This caveat means the abolition isn’t quite as positive as it first appears.
“While the harsh 55% LTA tax is being removed, benefits above the tax-free cash level will be subject to income tax. Allowing those with suitable protections to receive higher amounts of tax-free cash doesn’t simplify pensions as much as we would have hoped, potentially retaining layers of complexity.”
And David Stevens, retirement director at LV=, said while much of what the Chancellor did on pensions in his Budget today was positive and may encourage more people to return to work, or at least stop them from retiring early, there were limits to the Chancellor’s largesse.
He said: “Increasing the Money Purchase Annual Allowance to £10,000 is good news for retired people returning to work. Last year the Government announced a drive to coax those aged 50 and over to re-join the jobs market. However, many of these early retirees will have flexibly accessed a pension and would have been stung by a money purchase annual allowance tax charge after returning to work.
“A quarter of savers over 55 contributed more than £4,000 to their pensions in 2020/21. Increasing the limit back to £10,000 will help over 55s to return to work, navigate the cost of living crisis and boost the economy, without the risk of been hit by complicated and unfair tax charges as a result of auto-enrolment.”
Stephen Lowe, group communications director at retirement specialist Just Group, said not everyone would benefit from the changes.
He said: “For ‘Middle Britain’ the abolition of the Lifetime Allowance and the additional Annual Allowance will make little difference.
“For very 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. Higher earners will also benefit from the increase in the Tapered Annual Allowance and the earnings threshold that triggers it.
“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.
“The Money Purchase Annual Allowance does have clear benefit for many in ‘Middle Britain’. Anyone who’s taken a flexible payment from their pension, perhaps to carry them or their family through the cost of living crisis, now has more headroom to boost their pension savings and clears them from the tax tangle that the previous low allowance created.
“The freezing indefinitely of the Pension Commencement Lump Sum – tax free cash – at £268,275 may suggest the Chancellor has plans up his sleeve to recoup over time some of the generosity he’s shown in today’s Budget.”
