This year’s budget was always likely to contain relatively few major personal finance announcements given that we had a major package of personal tax measures announced in the autumn. This Conservative government does however like to pull the occasional rabbit out of the hat, and they did that in a significant way at this budget.
The only measures of significant note from a financial planning point of view will be those on pensions and childcare – we will focus on the pensions side of things here.
The last time we had a pensions rabbit out of the hat on this scale in a budget was probably the previous pension reforms in 2016.
Yes – the increase to the annual pension contribution allowance to £60,000 was widely anticipated and was effectively confirmed before the Chancellor even stood up so there were no surprises there.
There were also rumours surrounding the proposed increase to the Lifetime Allowance. Many commentators and ‘leaks’ were suggesting that the limit would be increased to £1.8m (which would have been fairly ironic given that this was the level it reached in the 2011/12 tax year before being reduced to the current level by the Conservatives).
What happened instead – the allowance being effectively abolished – was more of a surprise.
Now, before we get too ahead of ourselves, let’s consider the current political environment and also the practical implications of the Lifetime Allowance being removed.
First of all, the politics. I don’t think anyone would argue with the principle that we wish to retain experienced doctors and dentists in the NHS. There had been some suggestion that we might see a special scheme introduced just for the NHS (as has been done for judges), however the Chancellor decided that this would be ‘too complicated’ and instead opted to scrap the Lifetime Allowance altogether.
The first challenge that this legislation will have to survive is the court of public opinion. We saw the impact of this in spectacular style in the now infamous ‘Liz Truss’ budget. In effect, the opposition and the volume of the public outcry forced the government to U-turn on the vast majority of the measures introduced and even row further back on some tax measures to repair the damage that had been done.
Please don’t get me wrong, the scale of this single pension announcement is nothing like the Liz Truss budget, but it does carry some of the same headlines about being a measure for ‘the richest 1%’.
Quite ironically, Keir Starmer has jumped on that particular bandwagon, however, as reported in The Telegraph this morning, he himself has his own special secondary pensions legislation (Yes, the legislation even carries his name – Pensions Increase: Pension Scheme for Keir Starmer QC) to provide him with a larger tax privileged pension pot.
So let’s assume the legislation survives the initial ‘trial’ in the court of public opinion which could be over fairly quickly given that the newspapers will now most likely move onto the grilling of Boris Johnson which begins today.
Beyond this, the legislation needs to survive the next election. Labour have already said very clearly that they would look to reverse the scrapping of the Lifetime Allowance if they win power. Given that they have a circa 18% lead in some polls, we have to use a Labour victory as our working assumption surely, barring a major comeback story from the Conservatives.
The way that the legislation has currently been proposed (although we await the finer details in the Finance Bill) is that the Lifetime Allowance will still exist during the 23/24 tax year (just with a tax rate of 0%) and then it will be abolished completely in April 2024. Given that the latest date for the next election is January 2025 and political parties having a habit of calling them sooner, there could be a very small window before a change in government and, by extension, a change in this policy.
This will create a dilemma for those looking to plan their pension withdrawals in the coming years. There will be no single answer and the ‘correct’ option will be based on individual circumstances and priorities. In addition, the announcements raise more questions than answers in some respects:
- How are previously crystalised pensions to be treated?
- How will future pensions be treated if the Lifetime Allowance is re-introduced in the future?
One option will be to crystalise any funds that sit above the Lifetime Allowance, but in order to fully remove them from the pension system, you would need to take a withdrawal of what could be a significant chunk of the fund. These withdrawals will still be taxed at marginal income tax rates which are up to 45% – better than a 55% Lifetime Allowance tax charge granted, but only just.
The other major ‘loophole’ that this new legislation opens up is that we now have a situation where the amount of pension fund is effectively unlimited, but pensions still generally sit outside of the Inheritance Tax system – as such, many will begin to see pensions as even more of an attractive estate planning tool than is currently the case – watch this space for some changes here in the future!
Those who have not made pension contributions for several years due to Lifetime Allowance concerns could maximise pension contributions every tax year which would be eligible for Income Tax relief and are exempt from Inheritance Tax on death. However, these additional payments could in fact see an increase in tax charges payable if a future Labour government stick to their promise to bring back the Lifetime Allowance.
This is of course an area we will be discussing with clients in detail in the coming months. As I always say, the devil will be in the detail, and we shall await the finalised legislation before we make any definitive assessments.
What is clear is that there could be a fairly small window of opportunity to take advantage of these new rules – just how much advantage there will be will depend on a whole host of future unknowns!
Sometimes Financial Planning is all science. In this case, I think there may well be a fair degree of ‘art’ involved – trying to piece together the best solution based on the currently known situation and some sensible assumptions about the future.
