- Survey of 2,000 pension holders with investment platform AJ Bell shows many of those concerned about the Lifetime Allowance (LTA) will now re-start building their pension pot
- Although nearly three-quarters expect the LTA to make a comeback at some point
- Fear of pension tax tinkering will continue to influence savers retirement decisions, with 45% fearing tax free cash may be cut in future
- Certainty on pension taxation needed to encourage people to save more for retirement
Almost three-quarters of pension savers questioned by AJ Bell expect the Lifetime Allowance (LTA) to be re-introduced in some capacity in the future, despite the Chancellor’s decision to abolish the tax penalty on pension investment growth.
A punitive tax charge levied on those who build a nest egg worth more than £1,073,100, the LTA had become a thorn in the side of a growing number of pension savers. Years of ‘salami slicing’ saw the LTA cut by 40% from £1.8 million in 2010-11, although in a surprise move at last month’s Budget the government has now opted to reverse the trend and abolish the LTA entirely.
AJ Bell’s survey of more than 2,000 Sipp customers shows that among those concerned about hitting the LTA, around a third now say they’ll either resume contributions (27%) or take more investment risk (6%) thanks to the Chancellor’s reforms.
Although the news came as a welcome simplification of the UK’s labyrinthine pension tax system, many savers fear the change may be temporary. Labour has already pledged to reverse the policy were it to win the next General Election.
Almost three-quarters of those surveyed said they thought the LTA was likely to make a comeback in the future, with 21% saying they thought it would ‘definitely’ re-emerge and 52% feeling it would ‘probably’ be re-introduced. A further 23% said they were unsure, while just 4% said they felt confident the LTA would not return.
The Budget also capped tax-free cash at the 2022/23 tax year amount, meaning most savers will be limited to a maximum tax-free cash withdrawal of £268,275*.
Figures from AJ Bell’s survey show that 45% of pension savers believe that tax free cash will be cut at some point in the future, while less than a third (29%) think it will remain unchanged and just 7% expect it to be increased.
A similar survey conducted with financial advisers shows that a comparable 72% of financial advisers think a future government will probably or definitely re-introduce an LTA, while 19% think that tax-free cash is likely to be cut at some point.
AJ Bell is calling on all parties to commit to building cross-party consensus on pension tax issues and to avoid damaging tinkering which risks discouraging pension saving. It believes the LTA abolishment should be made a permanent measure, with any future efforts to reduce the cost of pension tax relief aimed at the annual allowance if future governments deem this necessary.
AJ Bell head of retirement policy Tom Selby says:
“Chancellor Jeremy Hunt’s decision to axe the lifetime allowance charge at the Spring Budget could yet prove to be a step towards radical simplification of the mind-bendingly complex pension tax rules millions of people are forced to navigate.
“However, after over a decade of near-constant tinkering with pensions, savers are understandably sceptical that the Chancellor’s big announcement will stand the test of time.
“This sense of uncertainty has been added to in the short-term by Labour’s attacks on the plans, with Shadow Chancellor Rachel Reeves describing the measure as a ‘Tory tax cut for the rich’ and committing to reversing the move if Labour wins the general election. It remains unclear how this would be achieved in practice, given the complexity of unpicking the tax rules again. People can only design their retirement funding plans around today’s rules and even if some form of LTA were re-introduced in future, it is highly likely some form of protection would be given to existing pension savings to avoid an unfair tax penalty.
“Nonetheless, it is telling that three-quarters (73%) of the pension savers we surveyed expect the lifetime allowance charge to come back from the dead at some point in the future, while just 4% trust the lifetime allowance will be permanently abolished. Policymakers should remember that endless tinkering with the tax system risks discouraging people from doing the responsible thing and saving for the future.
“There is little faith the ability to take up to a quarter of your pension tax-free will have any more stability either. As part of the decision to abolish the lifetime allowance charge, Hunt also announced tax-free cash would be capped at £268,275.
“On the back of that decision, almost half (45%) of pension savers surveyed said they expected tax-free cash to be reduced in the future, while 29% saying they thought it would remain unchanged and 6% expected an increase. A fifth of respondents were understandably uncertain about what would happen to tax-free cash in the future.”
The problem of pensions uncertainty
“This cuts to the core of one of the biggest challenges facing UK savers when making decisions about saving in a pension and making withdrawals. Ideally people would make these decisions in a clear-minded way, based on their personal circumstances and with their long-term goals firmly in mind.
“But the threat of the goalposts being shifted means all-too-often this isn’t the case. For example, in light of Labour announcing its intention to re-introduce the lifetime allowance, some people will inevitably be considering crystallising their retirement pot earlier than planned in an attempt to avoid the potential for a lifetime allowance charge in the future. This is clearly far from ideal.
“More broadly, for younger people, pensions require you to lock up money for decades in return for the tax incentives on offer. Given this, and the fact millions of people continue to set aside too little to pay for a decent standard of living in retirement, it doesn’t seem unreasonable to expect at least a little stability in the pension tax rules.
“While pensions and politics will always be intertwined, we remain convinced establishing an independent commission to find areas of political consensus and recommend a pension tax framework aimed at simplification and encouraging more people to save for retirement is the best way forward.”
*Those with a higher enhanced protected entitlement may retain this but will see it frozen at the April 5 2023 level, meaning no tax free cash on growth in their pension pot after this date.
Source: AJ Bell survey of 2005 SIPP holders in April 2023
Source: AJ Bell survey of 2005 SIPP holders in April 2023
Source: AJ Bell survey of 2005 SIPP holders in April 2023
Source: AJ Bell survey of 2005 SIPP holders in April 2023. Question answered by respondents that indicated the LTA had impacted their contributions or investments or felt it may do so in the future.
