Positive News in the Pensions Arena

The Lifetime Allowance, or LTA, is the maximum amount individuals can accrue in private pensions (i.e. excluding the State Pension) without incurring a penalty tax charge. This allowance has gradually been falling since 2010, from its peak of £1.8million, it steadily tumbled to £1million in 2016 and was set to increase in line with inflation (CPI) thereafter. Having reached the not so dizzying heights of £1.0731million in 2020, the allowance was once again targeted, this time being frozen until 2026 as part of government efforts to recoup some of the Covid support outlay.

The reason for today’s changes? To encourage individuals to continue working. Higher earners, particularly those in the medical profession, have been faced with limited pension contributions, annual allowance tax charges, and sizeable LTA liabilities in recent years, which has contributed to many opting instead for early retirement. At a time where such skilled professionals are in high demand, with vacancies far exceeding suitable candidates, drastic action was needed to remove such roadblocks and promote workplace participation.

So this is good news, right…? Correct, though the extremity of today’s announcement and the Chancellor’s generosity comes with a warning, that as always we must watch our step.

For many High Net Worth individuals, pensions in recent years have slowly taken more of a backseat role when it comes to retirement planning, and instead became a popular legacy planning tool. This is with thanks to their overarching trust structure which allows them (in many cases) to avoid Inheritance Tax altogether. However, with such attractive tax benefits offered, both during the life of the individual and beyond, one can’t help but feel these schemes are open to possible attacks by future governments. For many years, it has been widely anticipated that existing pension privileges would be reined in by virtue of being ‘too good to be true’, and today’s further improvements will no doubt reignite this debate in the years to come.

I noted shortly before sending this piece, that the current opposition announced their intention to both challenge yesterday’s Budget before parliament and revoke any successful changes to the LTA should they get into power at the next general election.

Clearly one cannot predict the future and as we have been saying to clients for many years, rather than speculate on the unknown, we should play the hand we are dealt. The argument for capitalising on such attractive immediate tax benefits remains relevant for as long as they are available. Though, we should be mindful that, in the same way we believe a diversified investment strategy reduces the risk of a single stock, the same can be said for having all of our eggs in a pension basket. Whilst pensions are likely to remain the foundation of retirement strategies for most; ISAs, investment accounts, offshore bonds and Venture Capital Trust (VCTs) can all play a significant role in achieving ones future objectives.

To discuss how the latest Budget may impact you and your future plans, please speak with your Cartlidge Morland adviser.