Anyone chasing FIRE will be interested in the ver recent news – the Lifetime Allowance for Pensions to be totally scrapped and annual allowance upped to £60,000. But is it a trap?
As I said in the my last post – it’s best to wait until the dust settles on the budget before drawing too many conclusions.
You can check UK government this site here for the actual text.
However, this is the big one for me and I suspect many on the FIRE journey.
The current lifetime allowance of just over £1m will buy you a decent lifestyle in your retirement – but above that the tax gets punative.
Doubly unfair is the treatment of final salary pensions (at 20x annual value) vs. defined contribution (face value).
Anyway, Jeremy Hunt has said that the lifetime allowance will go – totally and the amount you can squirrel away will be increased to £60,000 – partly to tempt doctors to keep working.
For GFF, my pension is worth about 50% of the current LTA, and if I don’t pay anymore into it, I’ll breach the LTA in a few years. As such, I’ve back pedalled on pension payments as part of a lifetime tax planning – paying the tax now to have money available now, instead of paying tax on it later.
BUT even the removal of the LTA, I am not going to change my mind and start contributing again. And the reason is very simple:
I don’t trust the UK GOV to keep the rules the same for the next 20+ years.
Things that can (and probably will change) include:
- Early access (I’m planning for 58 but who knows?)
- Tax-Free Lump Sum (currently 25% but will it be limited/scrapped in the future?)
- LTA reintroduced (possibly under Labour)
- Higher taxes on retirement income (put NI on pensions – makes it fairer)
- Shifting income tax bands (defo!)
Reading the budget report in detail tells me that the “25% taxfree lump sum” is now actually a “Pension Commencement Lump Sum” maximum of £268,275 (25% of £1.07m). So there’s a tax rise there – losing that will cost some people money.
All these and others can come in or go out and knock you off your financial feet.
Good luck, GFF.
Gentleman's Family Finances 
I don’t have a dog in this race as I am untroubled by the LTA, but
> I am not going to change my mind and start contributing again.
Why not? After all, if you had decided to stop before now, then with the changes you may as well restart. There had been a repeated tradition of grandfathering LTA amounts when dropped, as long you don’t contribute any more after taking the grandfathering allowance and signing the chit with HMRC. That should work OK for Sir should we get to see the LTA movie again, but with an uplift ‘twixt now and then.
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The main reason for stopping was a change of jobs to LTD status.
Before that I was salary sacrificing to NMW.
The sums are different now though
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I predict that the justification for pushing pension age upwards because of increasing life expectancy will be soft-pedalled as it becomes undeniable that life expectancy is falling. Lockdowns and vaccines, don’tcha know.
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I hope so – access at 58 (for me) of my SIPP, 60 for the LISA and 60 for my old DB pension means my own finances in around 20 years time (once the kids have flown the nest and are potentially still cash sinks) will be liberating.
Ironically, all that access when we need it least!
But state pension age won’t come down imo.
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It definitely was a bit of a surprise. Less surprising was the “spin” that it would help everybody as “our NHS” would hopefully suffer from a reduced churn from highly paid (and hopefully highly skilled staff).
Increasing the Annual Allowance to 60k will save me from a tax bill for breaching it next year and I’ll salary sacrifice as much as possible.
My day to day income needs are low because I’ve cleared the mortgages, all other debts and I’ve long been accustomed to living below my earnings.
Current market turbulence is painful, but I either take the income as cash incurring a minimum 32% loss via income tax or shove it in the pension and receive some of the saved employer NI added in.
If Labour follow their announced plans to roll the reforms back there would hopefully be some transitional protection put in place for those impacted.
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The news this morning from Labour:
https://www.theguardian.com/politics/2023/mar/16/labour-promises-reverse-jeremy-hunt-pensions-giveaway-richest-chancellor-budget
Makes me think that I’d be better off being cautious with further pension investment.
Particularly since I reckon our pensions are secure (around £1k a month in DB, £1.25k in DC + state pension – if you believe in that crock of gold at the end of the rainbow).
But at a LTD company, the alure of taking money out of the company and not paying for it (just yet) as a pension payment is difficult to resist.
I’ll have to weigh things up – if I was staff and could SAlary Sacrifice, I’d do it in a heart beat.
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It was a definite trap in a couple of ways.
“Jeremy” knew that it would be viewed as only for the rich and helping the 1% ( especially as pensions can be used as an IHT dodge ).
He spun it very hard as helping the NHS and hard working public sector folks so that’s put Labour in a bit of a bind.
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Won’t anyone think of the millionaires???
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