Some pension professionals have warned that the freeze on the lifetime allowance (LTA), rumoured to be included in Chancellor Rishi Sunak's Spring Budget tomorrow (3 March), could be a “kneejerk” reaction decision that leads to "unintended consequences".

The Budget, which is will likely set the stage for how the government hopes to revitalise the economy following the Covid-19 pandemic, is rumoured to include a freeze to the LTA at £1,073,100 for the rest of this parliament.

Hymans Robertson partner, Chris Noon, commented: “As rumours about freezing the increase on the lifetime allowance swirl, we remain concerned that the Treasury has a short memory. It should have learned that tinkering at the edges of pension taxation policy can lead to unintended consequences.

“Freezing the LTA again just 3-years after committing to increase it in line with inflation feels like a kneejerk reaction. Back in 2016 another kneejerk introduction was the tapered annual allowance which eventually led to senior doctors, amongst other affected groups, refusing to do additional shifts. This group were the pandemic heroes of 2020 and yet are likely to be impacted by this freeze.”

He added that a move such as this which would “reap short-term financial gain for the government” but cause consequences for doctors and others “who we valued most during Covid-19” and would have “political fallout”.

Even so, Noon stated that “the taxation of pensions needs a fundamental review and the inequities that remain in pace need to be addressed”, but he urged the Treasury to “resist the urge to tinker and work with the DWP and pensions community to develop a fit for-purpose pension taxation policy that addresses these inequities, rather than penalise our pandemic heroes”.

For others, the rumoured focus on the LTA was disappointing as it meant that the government was unlikely to wade deeply into reforming pensions tax relief.

Smart Pension director of policy, Darren Philp, said: “Although tinkering with the LTA doesn't raise big money, if the Chancellor does this, then it is unlikely that the Treasury will be pursuing major pension tax relief reform in the short term, although we can't rule anything out especially given its annual cost to the Exchequer.

“While we would like to see a fundamental look at tax relief to ensure long-term sustainability and fairness, this might have to wait for another day, although we would like the Chancellor to deal with the net pay injustice that disadvantages lower earners. This has to be a priority for the Chancellor as far as pensions go.”

Aegon pensions director, Steven Cameron, noted that the rumours of a freezing of the LTA had replaced rumours of “a move to a flat rate of relief at 25 per cent”, which he argued would have been “good news for basic rate taxpayers but would reduce the tax incentives higher and additional rate taxpayers receive when contributing to pensions”.

He continued: “Our research found high levels of support amongst advisers for a move to a flat rate relief of 25 per cent. But this was subject to the proviso that lower incentives for higher paid individuals mean the lifetime as well as annual allowance should be relaxed or removed entirely.

“Freezing the LTA is a far simpler change and the ability to implement almost overnight may appeal to the chancellor. But it does mean an increasing number of people who are ‘doing the right thing’ could face a tax penalty if their investments do well. Longer term, a move to a flat rate relief might be seen as a fairer approach, particularly if it also meant restrictions such as the lifetime and annual allowance could be removed.”

Aside from rumours around the LTA, which is dominating pension industry discussion about the Budget, commentators also appeared confident that the potentially problematic ‘triple lock’ on state pensions would be going nowhere.

Philp commented: “There is also the question of the triple lock on the state pension. While this is clearly unsustainable given the precarious nature of our public finances, we can't see the Chancellor removing this given the wider politics at play.”

Some onlookers have warned that the policy could end up costing the government vast sums of money, with the state pension set to benefit both from minimum annual increases of 2.5 per cent and increasing alongside earnings and inflation if the economy enjoys a post-pandemic boom.

Raj Mody, global head of pensions at PwC, concluded: “Rumours about changing the current tax system, especially the lifetime and annual allowances and the tax-free cash lump sum at retirement, circle around the industry all year along. In practice, for the last few years there have been few major changes, albeit several smaller technical changes. Despite pressures on the Chancellor to start recovering revenues to pay for pandemic borrowing, now would not be the time to go after pensions. The pensions industry is already under strain from having to keep up with a regulatory backlog, even before the disruption of Covid-19 hit, and the burden of other new legal developments.

“Elsewhere, levelling up the pension saving opportunities between the employed and self-employed would be a welcome step. The furlough and self-employed support schemes have highlighted a long-standing challenge around how different groups of workers are treated as part of our overall tax system. Another ongoing concern is how the self-employed are left out of the auto-enrolment savings system, which allows employed workers to benefit from company top-up contributions.

“The government’s decision to not make changes to the RPI index until 2030, even though it is otherwise widely discredited as an inflation measure, has left pension schemes in a fix. A Government override, enabling all schemes to make an immediate change to their benefit formulas, would be a welcome simplification.”

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