Jeremy Hunt has abolished the lifetime allowance in today’s Budget, as part of a range of measures designed to keep older employees in the workforce.
The lifetime allowance, which was previously just over £1 million will now be abolished, enabling people to save unlimited amounts in tax-efficient pensions.
The chancellor has also also increased the annual allowance – up from £40,000 to £60,000 a year. The money purchase annual allowance (MPAA) which applies once people have taken benefits from a defined contribution scheme has also increased from £4,000 to £10,000.
Announcing the changes, Hunt said that they were designed to stop senior doctors leaving the NHS, but he added that there were wider implications across different sectors.
He said: “No-one should be leaving work because of tax implication on their pension.”
He added that these changes will lift thousands of people out of the “complexity” of pension tax rules.
It has been widely expected that Hunt would increase pension allowances, although most were expecting the lifetime allowance to be increased to £1.8 million, not abolished altogether.
This change is likely to make pensions more attractive, particularly for higher earners as they can be highly tax efficient when it comes to passing on assets to the next generation.
Dean Butler, managing director for customer at Standard Life, part of Phoenix Group, commented: “Until today the LTA was on course to stay at £1.07 until 2026 but the Chancellor has gone further than anyone was expecting by abolishing the limit altogether.
“Billed as a reform to encourage older people to remain in work, the Treasury’s change of heart will have been influenced heavily by a need to retain senior NHS employees, many of whom having been taking early retirement to avoid substantial pension tax bills.
“While the generosity of the move will have taken everyone by surprise, there were good reasons to review a limit that was increasingly catching middle and higher earners, particularly those with defined benefit pensions, who have done the right thing and saved regularly over the years are who were bumping up against the limit. We’ll wait to see the detail on how this increase will be implemented and if tax free cash will be uncapped.”