Pensions: Spring Budget 2023 changes explained - what is the lifetime pension allowance?
The Chancellor has announced pensions annual tax-free allowance will increase by 50 per cent and the lifetime allowance limit will be abolished
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Jeremy Hunt has announced plans to abolish the lifetime allowance limit on pensions in a bid to reverse the trend of early retirements.
He said the move would encourage NHS doctors, consultants and other high-earners to remain in the workforce for longer. It also looks to deliver the Prime Minister’s pledge to grow the stalling economy.
The lifetime pension allowance (LTA) was first applied in 2006, when it was set at £1.5 million. It increased to a peak of £1.8 million by 2012 before gradually being cut, and it was due to stay at £1.07 million until 2026 - with savers incurring tax after that personal pension pot threshold has been exceeded.
Under the new plans there is no limit on how much you can save in your pension over your lifetime.
Jeremy Hunt told the Commons: “As Chancellor I have realised the issue goes wider than doctors. No one should be pushed out of the workforce for tax reasons.
“So today I will increase the pensions annual tax-free allowance by 50% from £40,000 to £60,000. Some have also asked me to increase the Lifetime Allowance from its £1 million limit. But I have decided not to do that. Instead I will go further and abolish the lifetime allowance altogether.”
Hunt said the changes would “stop over 80% of NHS doctors from receiving a tax charge” and incentivise “our most experienced and productive workers to stay in work for longer”.
He also told the Commons his plans to encourage older people back into work, saying he will “take three steps.”
The Chancellor added: “First, we will increase the number of people who get the best possible financial, health and career guidance ahead of retirement by enhancing the DWP’s excellent ‘Mid-life MOTs’ Strategy. Second, with the Education Secretary, we will introduce a new kind of apprenticeship targeted at the over 50s who want to return to work.
“They will be called ‘Returnerships’, and operate alongside skills boot camps and sector-based work academies. They will bring together our existing skills programmes to make them more appealing for older workers, focusing on flexibility and previous experience to reduce training length.”
What is the lifetime pension allowance and how does it work?
The lifetime pension allowance is the limit on how much you can build up in pension benefits over your lifetime while still enjoying the full tax benefits.
The allowance applies to the total of all the pensions you have, including the value of pensions you have through:
- any defined benefit (final salary or career average) schemes you belong to
- any savings you have in defined contribution pensions, but excludes your State Pension
If you go over the allowance you will generally pay a tax charge on the excess at certain times. You will get a statement from your pension provider telling you how much tax you owe if you go above your lifetime allowance. Your pension provider will deduct the tax before you start getting your pension.
‘Pensions tax-cutting bonanza’
Tom Selby, head of retirement policy at AJ Bell, said the lifetime allowance has “long acted as a drag anchor on strong investment performance and a deterrent to retirement saving, while also creating horrendous complexity in the system.”
He added: “It has also added to the huge turmoil engulfing the NHS, with senior doctors choosing early retirement over paying a pension tax penalty. Jeremy Hunt has unveiled a pensions tax-cutting bonanza far beyond anyone’s pre-Budget expectations and the most significant retirement policy intervention since the 2015 pension freedoms.”
However, Labour leader Sir Keir Starmer told the House of Commons “the announcement today is a huge giveaway to some of the very wealthiest.”
He said: “The only permanent tax cut in the Budget is for the richest 1%. How can that possibly be a priority for this Government?”
“The truth is our labour market is the cast iron example of an economy with weak foundations. Our crisis in participation simply hasn’t happened elsewhere, not to this extent, it is a feature of Tory Britain and global excuses simply won’t wash.”
In January, former pensions minister Baroness Altmann lobbied ministers to change “illogical” pension rules to help ease a workforce crisis in the NHS.
During a House of Lords debate, the Conservative peer said “even middle earners” were finding that their “supposedly tax-free pension contributions” were “causing them to receive huge tax demands that can even exceed the extra earnings”.
She said it meant that some doctors were “effectively paying to work for the NHS” and that the current system was “incentivising people not to work”.
Baroness Ros Altmann, a former pensions minister, said the speculated move by the Chancellor will not solve the health issues keeping people away.
She said: “Focusing on changing pensions and benefits will not solve the health issues keeping over-50s away from work. The Chancellor is right to consider whether increasing pension allowances or tightening benefit assessments would result in higher numbers of over-50s re-entering or remaining in the workforce.