Camels are notorious attracted to the eyes of needles.
As the dust settles following the Chancellor’s bombshell abolition of the Lifetime Allowance, lawyers and pension consultants are looking at what has actually happened and what it means going forward.
Rosalind Connor of Arc Pensions Law offers an interesting opinion in Professional Pensions
Connor .. questioned the reason given by government for abolishing the LTA – that it would help avoid people giving up work because of the LTA charge.
She said this “seemed unlikely” as the charge only arises when a pension is paid, and there were plenty of arrangements that people can put in place to avoid accessing sufficient of their savings to hit the charge – adding the reality could be that the LTA had outlived its usefulness.
Connor said: “It is only speculation, but it might be possible that the LTA charge has become unattractive for HMRC and the Treasury. Probably, the majority of people who reach their LTA are well enough advised to make use of the various methods to prevent a charge becoming due.”
She added: “The administrative burdens of providing the protections may be quite significant on HMRC, and if the LTA charge is not bringing in much revenue, it may well make sense to remove the burden and the charge simultaneously.”
Much as we’d like to think that affluent people go to work to top up their pension, I think most of us would agree that the chance to re-enter the workplace to rejoin a pension scheme is low on the priorities of someone in their fifties who is already close to being a pension millionaire. If we all were in that position, wouldn’t that be nice!
I suspect that dispensing with the LTA was more opportunism than strategic policy. It has struck a chord with many people and excited interest in pensions nationally. Tom Mcphail is right to point to this budget as a “pension budget”
Best pension budgets of all time:
1. 2014
2. 2004
3. 2023
This is not open to debate— Tom McPhail (@PensionsMonkey) March 15, 2023
Whether it will bring prosperity to people in later life , depends on how responsibly people act. That includes commentators, advisers , politicians and most of all the pension millionaires whose behavior will be carefully watched.
For most people, the LTA is a fairytale problem, few of us have Del Boy’s optimism
But those people committed to making pensions more adequate, fairer and predictable will not want to see the Minister for Pensions sideline by an unseemly squabble about needles and loopholes.
The backlash.
As the initial optimism recedes, the predicted backlash arrives. The skepticism of the legal profession is as nothing to the scorn for the reform from the front bench of the Labour party. Rachel Reeves, shadow chancellor, said Labour would force a Commons vote on the pension changes next week – laying down a marker for what a Labour administration would do if returned to power in 2024.
Reeves made her policy clear yesterday lunchtime , telling the BBC that a Labour government would reinstate the lifetime pension allowance and create a targeted scheme for doctors rather than allowing a “free-for-all for the wealthy few”.
Martin Lewis – bemused
Martin Lewis’ money show dealt with the pension reforms in around 90 seconds, with Lewis explaining that rich people should be filling their boots before while restrictions were off. Steve Webb has been suggesting this is just what will happen – with good reason
Labour’s pledge to reverse abolition of lifetime allowance could spark ‘gold rush’ into pensions, former minister Steve Webb says
People will maximise pension pots over next 2 years then cash out before the next election. The cost of the policy could end up being far higher
— Steven Swinford (@Steven_Swinford) March 16, 2023
This is not presenting a good look for pensions or the Government. People who have done the right thing, worked and saved hard all their life deserve better than to have their pension rights kicked around as a political football.
Pension decisions are quite complicated enough, without having to factor in ” political risk”. The idea of a pensions consensus in parliament was to allow all sides to offer predictability on which people could plan. Until Labour stabilizes what looks like policy on the hoof, the positive aspects of these reforms will be blighted.
Martin Lewis isn’t the only one looking bemused, I am – and you may be too.
Financial advisers can stabilize the situation with their clients.
So what of the financial advisers, who have so much influence on the planning of the wealthy? I do not see any evidence of them inciting a “free for all”.
This article , posted on linked in by IFA Kay Ingram is typically responsible.
Meanwhile, the FT has been running a clinic for its wealthy readers which included the following questions
I’m retired with a £2mn pension and have other assets. Should I sell them and put the proceeds into a pension pot?
What can I can do now to limit the impact of anything Labour might do?
I’m rich and worry about inheritance tax. What can I do to maximise my IHT benefits, assuming the new pension tax regime stays in place?
I am still working, but stopped contributing to my pension because I hit the LTA. Should I restart payments?
I am a buy-to-let investor. Should I sell property and put funds into my pension?
Fortunately, there are plenty of good advisers around who will answer these questions with calm and deliberation, They have the chance to ease concern that tax-avoidance will give way to tax-evasion.
There is nothing so easy to exploit as the rich person staring at the eye of a tax-loophole.
The introduction of LTA was simply a tax on the prudent and further damage to the confidence in pensions came with the reductions of the £1.8M cap which was supposed to be index linked.
The current level is 40% of the indexed original cap. Fiscal drag at its worst.
One basic principle of taxation is that it should not be retrospective. Then again “principals” is a quaint old fashioned concept
It does seem likely that the real motivation for the abolition of the cap was simply that its administration costs for HMRC were far too high relative to its yield in term of tax income.
I do wonder about the treasury’s cost estimates of the changes. While the LTA itself may not have raised “enough”, it made people reduce or cease pension contributions. If these contributions recommence, then specifically for DC members there will be reduction in taxable income (presumably at higher rates) or equivalently an increase in pensions tax relief on contributions. From what I can find, the treasury has estimated most of the cost of the changes is in foregone LTA charges rather than an increase in tax relief on increased contributions. Which suggests they do not expect a huge increase in contributions. This doesn’t feel quite right, based on the speculation that large numbers of people will recommence or increase pension conts.
I think that a lot of money will come back into pensions , not just from payroll saving but from savings. All of this will get tax advantages and will be controversial if higher rate taxpayers hoover up all the pies.
There seems so much misunderstanding of this change, which at last removes one of the big illogical elements that makes pension planning in DC schemes almost impossible and incentivises early retirement in DB for higher earners (not mega wealthy but even those on around £80,000pa)
Just changing it for DB was considered too open to legal challenge, but there has long been a rush by GPs and senior consultants – potentially added to more recently by senior nurses, police officers, armed forces, prison officers and many others who would be financially better off by retiring earlier. Once they reach about £30,000 a year pension, they could stray over the LTA, no other change would capture all this risk and quickly stop the exodus. I do believe removing LTA is a welcome simplification for DC in particular, because it otherwise punishes investment success, which runs counter to the whole purpose of long-term investment.
Sadly, this has now been turned into a political football, being kicked around with hob nailed boots. Those who call for the measure not to go ahead will be ensuring fewer top people in our essential public services and an accelerated exodus of experience that our country really needs. Whenever politicians meddle with pensions like this, it never ends well!
I agree with you Ros, though the noise from HMRC is that people impacted by the LTA had become clever enough to avoid it, meaning that it was delivering the Treasury minimal revenue at considerable expense.
I don’t think the LTA has been ditched because it stopped us saving – or working. I think it was ditched because it wasn’t working.
Labour won’t win many votes by saying they will reinstate the LTA, but they will shore up their existing supporters. This is probably more important to them right now.
Whether they actually reinstate the LTA once the furore has died down – is another matter. For now, the threat is enough to negate the value of it being ditched – which is a shame.