Coherent, rational, co-ordinated, simple. These are just a few of the words that have never been used in connection with the UK pensions regime – and the latest changes mean that people with significant pension pots cannot plan confidently for their retirement.
In this blog, we’ll look at some of the major changes that have taken place over the last few years and see what an adverse effect they have had on pension provision.
The Big Change In This Year’s Budget
Just when we (foolishly?) thought that there would be no more surprises, the Government pulled a big one out of the hat in this year’s Spring Budget.
The pensions Lifetime Allowance (LTA) regime underwent major surgery when the tax on any excess pensions was abolished but, bizarrely, the LTA itself will not ride off into the sunset until April 2024 ‘following consultation’.
Prior to the Budget, the rule was that there was no limit on the size of pension fund you could accumulate. However, there was a cap of £1.073m – often referred to as the ‘tax-privileged amount’ – and anything in excess of this was subject to 25% tax when you started taking your pension. Even worse, if you decide to take the excess as a lump sum, the tax rises to 55%. Not great news if you are a basic rate taxpayer.
The Government has retained the LTA, whilst abolishing the tax. I have no idea whether, come April next year, they will honour the announcement to remove the LTA itself. It would be pretty daft to keep the LTA but remove the tax – it would be like keeping double yellow lines but removing the fine for parking on them.
If that’s not confusing enough, the Labour Party has said that if it is elected it will reintroduce the LTA. And how would that be done? Would the LTA be lower or higher? There were rumours a-plenty a while back that the LTA might be cut to £800,000 so who knows what might happen with a new Government. What about all the people who increased their pension contributions, expecting to pay no tax on the (hitherto) excess funds? How are they expected to plan for their retirement if they think that their prudent saving will be punished?
An Increase In The Pension Annual Allowance
Another way in which savers might be disadvantaged is to do with another announcement in the Budget – an increase in the Pension Annual Allowance. Similar to the pension fund size, there is no actual limit to the amount you can contribute to a pension each year but there are severe penalties for contributing more than the annual allowance.
This was a maximum of £40,000 but increased to £60,000 in the Budget. If you combine the new annual contribution maximum with ‘carry forward’ of unused reliefs, it is possible to put £180,000 into your pension – a bright idea is it not? Well, not if this puts you over the LTA – or in a position where you might be in the future. if the LTA doesn’t get abolished or, alternatively, is abolished but reinstated in the future you will be a sitting duck. You will lose 25% of the excess for being silly enough to take care of your retirement needs.
If this doesn’t strike you as being already sufficiently disjointed, cast your mind back to when the LTA first came in. It was originally £1.5m, then increased to £1.8m before collapsing like a pack of cards to its current level – a 40% drop. Along the way, all sorts of devices had to be installed to protect people who had built up funds in good faith. There was Primary Protection, Enhanced Protection, and a whole host of Individual and Fixed Protections, all with their own sets of rules. I’m sure you can see how logical and well-thought out this was.
Successive Budgets have introduced an LTA, increased it by 20%, reduced it by 40%, produced a mind-boggling set of rules to cope with its changes, and then abolished it. No joined-up thinking visible. No wonder pensions are referred to as a political football.
Tax Free Cash – The Pension Commencement Lump Sum (PCLS)
Another quirk of the new rules is the Pension Commencement Lump Sum (PCLS) – often referred to as ‘tax-free cash’ – although it is only guaranteed to be tax-free if you take it while you are tax-resident in the UK. If you take it while tax-resident in another country, it could be taxable. If you are thinking of retiring abroad, take advice before you relocate otherwise you might lose a valuable option. The maximum PCLS that can be taken is still limited to the current LTA and is £268,275. Will this limit be removed if and when the LTA itself disappears next year? Answers on a postcard, please.
Getting Help Navigating The UK Pension Regime
So, what should you do if you are over the LTA or are in danger of going over it in the years to come? The most critical thing is that you should take advice. Trying to navigate your way through current pensions legislation is a massive task – making a mistake could be very costly if you try to do it on your own. If you need assistance navigating the somewhat confusing waters of the UK Pension Regime, get in touch. One of our advisers will be happy to help.
This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.
This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.