The post-election future of pensions: the Lifetime Allowance and tax relief
In the second of our two-part series on the post-election future of pensions, we look at plans for abolishing the lifetime allowance and manifesto pledges on pensions tax relief.
Removing the lifetime allowance
Of all the pensions-related legislation left in limbo by the general election announcement, the abolition of the lifetime allowance (LTA) is likely to have caused the most short-term frustration.
The LTA was formally abolished by the Conservative government on 6th April this year . Before then, the LTA capped the amount of money someone could save tax-efficiently into a pension at £1,073,100.
At the same time as the LTA was abolished, the Annual Allowance (AA) - the amount someone can save tax-efficiently into a pension each year - increased from £40,000 per year to £60,000.
However, legislation needed to clarify the LTA changes was not completed before Parliament was dissolved.
What’s in the manifestos?
Before the election manifestos were released, Labour had pledged to re-introduce the LTA, potentially causing further confusion. But the party now seems committed to supporting its abolition along with the Conservatives. No other party has said that it would re-introduce the limit.
The biggest political challenge will be making sure whoever wins the election understands the urgency of getting LTA legislation right, in the right timescales.
How could it affect reward and benefits?
In the short term, the LTA abolition is most likely to affect high earners, especially those who want to withdraw money from their pension right away or make near-future plans for their finances.
But for that group of employees, the impact is potentially significant – so much so that earlier this year HMRC suggested that people should even consider delaying their retirement plans until the legislation was completed.
A whole new set of acronyms, allowances and rules could be in the pipeline if and when the legislation is picked up again, requiring fast action from pension schemes to get the new rules implemented.
For employers who have offered cash in lieu of pensions for high earners, both the LTA and AA changes may now mean there is more scope to continue to contribute tax-efficiently to a pension instead.
The Money Purchase Annual Allowance (MPAA), which is the maximum amount that someone can contribute into a pension once they have started to access their DC savings, was also increased from £4,000 to £10,000 when the LTA abolition was announced. This could mean older workers have more scope to replenish their savings if they have already accessed their pensions.
Employers’ pension communications may also refer to the LTA and AA, so reviewing these to make sure they reflect the updated rules is also important.
Abolishing the LTA may also affect Excepted Group Life arrangements – death benefit arrangement not registered with HMRC - and the way that death in service lump sums are paid. More clarity, however, around the final legislation is need.
Pensions tax relief
One of the major benefits of workplace pension saving is tax relief. But barely a Budget goes by without speculation around whether the chancellor will take aim at the relatively generous breaks that pensions provide.
As far as the current manifestos are concerned, there’s little to suggest immediate change in the future.
What’s in the manifestos?
The Conservatives’ manifesto Pensions Tax Guarantee commits to no changes to the tax regime for the next five years. Employees over 55 (57 from 2028) would still be able to withdraw 25% of their pension pot tax-free as cash, and pension contributions would still be subject to marginal rate tax relief – now without the restriction of the LTA. Labour has also said that it has no plans to change current arrangements.
Elsewhere, the Green Party has proposed a flat rate of pension tax relief of 20% for all, rather than marginal rate tax relief. Reducing the generosity of tax relief could have a number of knock-on effects, including how tax is treated during the transition from the current regime to flat rates, and its effect on younger workers, who will miss out on higher rate pensions tax relief as their earnings increase over time.
What does it mean for reward and benefits?
Although the Conservatives have made their commitments clearer than Labour in terms of timescales and details, there is likely to be little change to tax and pensions in the immediate future, which is good news for benefits design.
For higher earners, the abolition of the LTA (see above) and the increased AA will further improve tax-efficiency. That would give employees approaching retirement some certainty around tax rules, and make planning easier.
For younger workers, there is still plenty of time in the future for tax rules to change, but the current regime means pensions continue to be an extremely valuable workplace benefit for employees of any age.
Helping employees understand the value of saving into a pension – including tax advantages, employer contributions and using salary sacrifice where appropriate – will continue to be a priority.
Frozen tax thresholds feature in both Labour and Conservative manifestos, which could make pensions’ tax-efficiency an even stronger selling point, especially using salary sacrifice.
