In an e-newsletter in April, some of Wren Sterling’s experts discussed the implications of the Chancellor’s decision to abolish the Lifetime Allowance from April 2024 and reduce the LTA charge to 0 percent in the meantime, removing the cap on people’s lifetime pension savings.
Prior to this point, anyone with £1,073,100 or more in their pension pot faced a 55 percent charge on their savings above this if the excess was taken as a lump sum or 25 percent if designated for income.
What’s more, the annual allowance, the maximum you can save into a pension in a financial year tax-free, rose from £40,000 to £60,000.
On the surface, this looked like a fantastic opportunity for people to further utilise their pension allowances to build retirement wealth tax-efficiently.
Lifetime allowance planning opportunities
Austin Hutchinson, Wren Sterling’s Financial Planning Director, says the initial noise has died down now that financial planners have been given the opportunity to pick through the detail, but there are still excellent opportunities for clients to optimise their strategies.
One such piece of detail is the restriction on the tax-free lump sum that can be crystallised. That is remaining at £268,275 or a higher amount if any valid LTA protection is held. So, in theory, you could over-fund your pension but be left in a position where you can’t withdraw more tax-free, then clients could have too much money tied up in their pension, complicating their future financial planning strategy.
Austin says: “People I speak to tend to think it’s probable that Labour will be in government next so unless they are close to age 55 when they could fully crystallise, they are not using this as an opportunity to over-fund. The concern is that they could be unfairly penalised if Labour return to government and follow through with the reversals that they have threatened.”
However, Austin sees opportunity for people close to, or over age 55, who might have stopped paying into their pensions for fear of breaching the lifetime allowance.
“The tax-free lump sum restriction makes it much less attractive to some people to over-fund and they may be better off in different solutions, but for some in workplace pensions, it’s worth considering re-starting contributions, especially where salary sacrifice arrangements are in place with a National Insurance incentive.”
Younger people earning high salaries could be able to hit their retirement goals earlier with the increase in the annual allowance. An extra £20,000 a year for ten years with an annual growth rate of five per cent could allow a 35-year-old to be in a much better financial position by the time they start to think about retiring and reduce the need for them to fund their pensions so heavily in future, as investment growth drives the pot growth.
Austin concludes: “The main opportunity for clients is to fully understand how the changes could affect them and their family. Speaking to their financial planner about whether over-funding could be right for them is a good starting place.”
Doctors’ pensions in good health
There has been speculation that a primary driver for cutting the Lifetime Allowance is the need to stop senior medical professionals exiting the NHS, as they were highly susceptible to the charge due to the way their public sector pensions were structured and paid into and the level of earnings they accrued over a lifetime.
Indoo Gordon works in Wren Sterling’s Wilmslow office and is a Specialist Medical Adviser, working with doctors to meet their unique requirements.
She says her clients are “delighted with the LTA news but also the fact they have a £60,000 annual allowance as well (an increase from £40,000) and can contribute again even if they have Fixed Protections in place.”
For doctors, it’s not just the charges on their total retirement savings. Indoo says that it is new measures that will be introduced by the NHS in coming months to allow staff to retire and then re-join the NHS pension scheme will affect planning more.
“By and large the medical world is a “vocation”, so earnings are secondary to what they want to do as a fulfilling job. However, they want to have flexibility and not suffer draconian tax penalties or arduous processes and adviser interactions to ensure their planning is in order.
“A more common event now is reducing hours or using the ‘retire and return’ facility and new NHS flexibilities plus relaxation of some of the more punitive issues surrounding the ‘retire and return’ scenario is of more value than the LTA and AA changes, in my view.”
“Financial planning remains largely the same in that their priorities are typically to insure against adversity, invest any surplus and ensure “succession of wealth” to their beneficiaries.”
Indoo is sceptical over whether there would be a reversal of the policy by Labour because of its potential impact on NHS staff, despite their obvious commitment to the job: “I would expect something of a stampede to take advantage of the current rules and potentially an exodus of senior NHS staff, if it was announced that is to be reinstated.
“It was a problem before but to have something put in front of you and then withdrawn is much more frustrating and will erode trust in the government.”