Financial advisers fear the Chancellor’s surprise decision to scrap the Lifetime Allowance (LTA) at last month’s Budget may be a short-lived policy decision.
A punitive tax charge levied on those who build a nest egg worth more than £1,073,100, the LTA poses a financial planning dilemma for many advised clients. Years of ‘salami slicing’ meant the LTA had been cut by 40% from £1.8 million in 2011-12, although in a surprise move at last month’s Budget the government has now opted to reverse the trend completely and abolish the LTA.
While the news came as a welcome simplification of the UK pension tax system, there are already questions over whether the policy will last. Labour has pledged to reverse the change were it to win the next General Election, with Shadow Chancellor Rachel Reeves describing the measure as a ‘Tory tax cut for the rich’.
A survey of advisers conducted by AJ Bell shows that the majority of advisers (72%) expect a future government to re-introduce the LTA in some form.
A further 19% said they thought it was a possibility, while just 5% don’t believe a future government is likely to bring back the LTA and 4% felt unsure.
Anticipating the possibility of political flip-flopping on pension taxation, more than half of advisers surveyed said they expected at least some clients to crystalise before the next General Election in an effort to mitigate any change in legislation that could land them with a tax charge:
Source: AJ Bell survey with financial advisers. 224 responses gathered in April 2023. Q: 'Thinking about clients that may experience LTA issues under the pre April 6 2023 system, and who stand to benefit from the LTA being abolished, which statement do you feel is most applicable?'
The Budget also capped the maximum Pension Commencement Lump Sum (PCLS) at the 2022/23 tax year amount. It means that going forward, most savers will be limited to a maximum tax-free cash withdrawal of £268,275, with separate rules put in place for those with enhanced protected tax free cash.
Asked if they expected the cap on tax-free cash to remain, advisers were split with 55% saying they expected it to remain unchanged, while 19% expect it to be cut and 11% think it could increase in future. A further 15% said they felt unsure.
Rachel Vahey, AJ Bell head of policy development, comments:
“The budget changes have – in a single stroke - removed much of the complexity in pensions. It should now be easier for clients to understand their pension saving choices, especially those with larger funds who are bumping up alongside the old lifetime allowance.
“But this positive development risks being shattered by the political uncertainty surrounding the removal of the lifetime allowance. Advisers and their clients have been put in the unenviable situation of being piggy in the middle of a political pensions spat.
“The risk is a desire to outwit future changes drives clients’ choices on when to crystallise funds, rather than a balanced decision based on the current situation and what is best for them and their families.
“It’s unfair to thrust advisers and clients into this bubble of uncertainty. I hope that all political parties open up communication with the industry, so collectively we can reach a position all support, and, importantly, advisers and their clients can trust won’t change overnight.”
