Long read: Speculation over pension allowance changes peaks ahead of spring Budget

Speculation that the Chancellor is set to announce changes to pension allowances in the upcoming spring Budget has surged, amid reports that the government plans to increase the lifetime allowance (LTA) from the current frozen rate of £1.0731m.

This is alongside reports that the annual allowance will increase from £40,000 to £60,000, while the money purchase annual allowance is also thought to be set for an increase from £4,000 to £10,000, following recent industry pressure for the allowance to be reviewed.

Industry experts suggested that the changes could be good news for savers, with LCP partner, Steve Webb, arguing that if the rumours prove true, the “jaw-dropping changes could be a game-changer” for those who are currently limited when it comes to saving into a pension.

“Up to two million people who have already breached LTA limits, or could expect to do so, will now find it worth exploring saving more into a pension,” he continued.

“ A big change could also remove some of the complexities of the system, as those who had previously locked into LTA at £1.5m or £1.25m on condition of no further pension saving would be free to save more.

"The changes could also be a windfall for those with large pensions on the brink of retirement, who would now pay far less tax when they access their pensions.”

Adding to this, Hargreaves Lansdown head of retirement analysis, Helen Morrissey, argued that, after years of cuts and stagnation, changes to the allowances could "breathe new life into people’s retirement planning and could be instrumental in helping groups such as senior NHS consultants to remain in the workforce".

Aegon pensions director, Steven Cameron, also said that the rumoured changes could be “really good news for potentially millions of pension savers", emphasising that these allowances can discourage individuals later in their working lives from staying in or returning to the workforce.

"Any increases to these will be good news and in line with the Chancellor’s aim to get this group off the golf course and back to work," he continued.

"We’re hoping for bold increases as each of the allowances was far higher at some point in the past and if they had been inflation protected rather than cut back by previous Chancellors, much more could have been built up in pensions to provide more comfortable retirements.”

PensionBee director of public affairs, Becky O’Connor, also agreed that an increase to the LTA or AA would prove popular, restoring "much-needed incentives for people to prioritise their pensions as they approach their later working years".

Indeed, recent research from PensionBee found that the nearly two thirds of savers (64 per cent) think that the annual allowance should rise with inflation, while over a third (37 per cent) wanted to see the LTA unfrozen.

However, O'Connor warned that it is "hard to see how these moves will get people back to work - once you’ve taken early retirement and worked out this is affordable, it’s unlikely that being able to put more in your pension would encourage you back".

"In fact, it’s possible that high earners who can maximise these allowances could end up leaving work sooner as a result of the higher limits, as they will be able to build up more, more quickly," she stated.

“If someone has given up work early due to ill health before managing to build a decent private pension pot, then these measures are irrelevant - if you can’t work, you can’t work.

"Equally, for people on low or moderate incomes who are only paying the minimum into their pensions, the annual and lifetime allowances are less relevant anyway, as they are probably not likely to hit either of them, even at the current levels."

Adding to this, St. James's Place divisional director for retirement and holistic planning, Claire Trott, noted that although the possibility of an increase to the LTA will be welcomed by many who are planning to retire now, it won’t help those that already have access to their pensions in the same way.

She explained: "When a pension is accessed it is tested against the LTA at that point in time, so for the most recent years the amount of LTA used has been significantly higher than it would be under an LTA of £1.8m.

“For example, if someone took benefits of £1m in 2016/17 or 2017/18 then they would have used up 100 per cent of their lifetime allowance and this increase won’t give them anymore.

"However, should they take benefits of £1m under the leaked increase of £1.8m then this would only use up 55 per cent of their lifetime allowance, giving them much greater scope for benefits.

“This again shows how the unpredictable changes in allowances such as this can be a real disadvantage to individuals. The way in which some can access benefits may well have pushed them into a situation where they had to access all their benefits in one go at a time which will have resulted in tax charges.”

And broader changes may also be needed, as Evelyn Partners managing director, Jason Hollands, argued that while increasing these pension allowances would reduce the damage they do, "even better would be a more thorough reform of how pensions are taxed".

He stated: "High earners with big pension pots do benefit from inappropriately generous tax treatment of pensions, but there are much better ways of restricting this that these crude limits."

AJ Bell head of retirement policy, Tom Selby, also argued for broader simplification in the pensions tax system, arguing that the "constant salami slicing" of pensions allowances have not only reduced retirement savings incentives, but also created "unwieldy complexity which makes explaining the benefits of pension saving unnecessarily difficult."

“There are currently three versions of the ‘annual allowance’, a non-earners allowance, a lifetime allowance and seven different versions of lifetime allowance ‘protection’," he explained.

"Raising three of these allowances would be a positive step in the right direction, but nobody would create a system that looks like this from scratch. As is often the case, complexity has built incrementally over the years.

“As automatic enrolment introduces millions of people to pension saving, many for the first time, there has to be hope that engagement levels will improve.

"If that happens, we need to make sure the system they engage with makes sense and is relatively straightforward to understand. Ideally, there also needs to be at least some confidence the rules won’t retrospectively change in the future.

“To reach this point, a new independent pensions commission should be formed with the aim of delivering proposals which simplify the system and encourage more people to save for their financial future.”

Yet industry experts previously suggested that the focus on pension allowances could mean that changes to pension tax relief are less likely in the Budget, with Hollands arguing that "it looks very unlikely that Hunt would raise allowances with one hand and cut tax relief with the other".

"It would also be unpractical to be able to implement such changes so close to the new tax year, as well as politically risky for Hunt to target the tax benefits of private pensions after the significant tax crunch announced at the Autumn Statement, and on top of the likely acceleration of state pension age increases," he stated.

“Pension tax reliefs for higher and additional rate taxpayers – the proverbial cat with nine lives – look set to survive for now but their long-term survival should not be taken for granted. ”

However, the rumoured changes have prompted speculation that the Chancellor is indeed preparing to introduce a higher state pension age, with a review on this currently underway.

“With these measures, it looks increasingly likely that the Chancellor is preparing the nation for a higher state pension age," O'Connor stated.

"Increasing it sooner from 67 to 68, as is now on the cards, could potentially hit people now in their late forties and early fifties - this group will need as much help as they can get to build up their private pension pots by enough to keep their dream of retiring before the state pension age alive.”

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