For higher earners, the ability to contribute into pensions has, up to now, been curtailed by two restrictions. The Annual Allowance (AA) restricts the amount a person can pay into a pension during a particular year. The Lifetime Allowance (LTA) seeks to cap the size of the fund that accrues during your lifetime. Read more on the key pension tax relief rules here.
These limits are perceived to cause practical problems. Whereas private sector workers caught within the restrictions can control their pension contributions, public sector workers usually cannot, as their employers will continue to contribute based on their earnings. In practice, the only way high earning public sector workers (such as senior NHS clinicians) are able to limit their exposure to AA and LTA charges is by restricting their earnings by choosing to work less, or retire (if only temporarily in the case of some healthcare professionals).
In Budget 2023, the Chancellor announced the abolition of the LTA and the raising of the limits for the AA to “help remove incentives for doctors to work reduced hours or retire early due to pension tax concerns. ”However, the changes from 6 April 2023 apply to all pensions meaning individuals with large pension pots across all sectors of the economy can benefit from them.
The proposed changes will be welcomed by higher earners looking to contribute more into their pensions and individuals who already have pension funds valued above the £1.073m LTA – particularly those who do not have a higher protected LTA. We would expect the new rules may lead to changes in widely used pension withdrawal strategies recommended by Independent Financial Advisers.
It is important to acknowledge that the Labour party have stated they will reinstate the existing LTA charge rules if they come into power. We may also see further technical changes when the LTA is formally abolished (expected in 2024). Therefore, there may only be a limited window of time for individuals to benefit from these new rules.
Any individual with a large pension pot should now seek expert advice on their options and the related tax implications for their family finances while the new rules remain in existence.
Helen Jones