Jason Whyte, Associate Life & Pensions Partner at EY, comments on the Chancellor’s announcement to freeze the lifetime allowance:
“Freezing the lifetime allowance will help the Chancellor to reduce the ‘cost’ of higher rate tax relief – not much in the short term, but quite a bit by the end of the 2025-26 tax year. It may also turn out to be a precursor to more comprehensive pension reform in the future.
“The lifetime allowance affects high earners and those approaching retirement age the most, including those with defined benefit pensions. As the value of high earners’ pensions rises over the next five years towards a lifetime limit that will remain fixed, more and more individuals will find they need to stop contributing to avoid breaching the limit. The Budget Red Book predicts this will save £300m per year in tax relief by 2025-26.
“The lifetime allowance is seen as a key mechanism to limit future tax relief bills that only impact a small segment of the population, but it is not without challenges. It affects long term savers who have made good investment decisions as much as it does high earners, and it also affects those in Final Salary schemes – many of whom are in the public sector. In the last Budget, the Chancellor raised the threshold for the annual contribution taper so as not to disadvantage senior NHS staff working extra hours during the pandemic, and by using an extended freeze so the impact is limited in the short term. He has been similarly cautious this time around.
“The Chancellor did not announce anything more on pensions tax reform today, but the industry still expects an eventual “root and branch” review as the economy recovers. The taxation of pension savings is an extremely complex area, and any major change will be difficult as it will involve changing long established rights, with the burden falling on the older and wealthier. But the Chancellor may be hoping that a large-scale simplification of the rules, perhaps coupled with settlements and protections to limit the pain of transition, will be an acceptable trade-off for less generous tax relief for high earners.”
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