Jeremy Hunt’s spring 2023 Budget is a broadly positive move for higher earners, but the devil will be in the detail, wealth advisers say
Wealthy savers were given an unexpected boost when Jeremy Hunt announced the abolition of the lifetime limit on tax-free pension contributions in Wednesday’s Budget.
First brought in by Gordon Brown in 2006 to draw more tax revenue from the wealthiest, the lifetime allowance (LTA) had disincentivised pension saving — and the signs are that its removal is already having an impact.
‘The abolition of the LTA is very welcome and will massively simplify the complex pension rules for our clients,’ says Petronella West, CEO of London wealth management firm Investment Quorum, whose phone has been ‘red-hot’ since the announcement.
‘I have had a flurry of calls already from clients wanting to top up their pensions but we are advising with care.’
Steve Webb, partner at LCP and former UK pensions minister, says money is set to ‘flood’ into pensions from higher earners following the Budget.
Hunt overhauled a series of pension changes in recent years which have caused some high-earning professionals to stop saving when they hit the LTA limit.
The annual allowance (AA) of £40,000 at which contributions were capped has been lifted to £60,000 — and the confusing ‘tapered’ AA has been changed so that the highest earners can put in up to £10,000 rather than £4,000 each year.
Webb calls it a ‘sea-change’ in government policy, but warns: ‘There will be an urgent need for such people to take financial advice to make sure that they are best placed to take advantage of the much more positive regime which has just been introduced – perhaps even before the start of the coming tax year and the new regime.’
Reforming the pensions lifetime allowance, annual allowance and money purchase annual allowance to encourage highly-skilled workers, such as senior NHS doctors, to remain in the labour market, and help to tackle NHS waiting lists. pic.twitter.com/5rBNwC0C5B
— HM Treasury (@hmtreasury) March 15, 2023
Jason Hollands, managing director of online platform Bestinvest, part of wealth manager Evelyn Partners, welcomed the news.
‘For those who had ceased contributing to pensions due to the lifetime allowance, renewed contributions should be back on their radar, especially at a time when the income tax burden is rising as pensions continue to provide tax relief at your marginal rate.’
However, he was frustrated by the continuation of the ‘hideously complex tapering regime for very high earners,’ even though the threshold has been raised.
‘A sting in the tail is that the tax-free lump sum will now be frozen at a maximum of £268,275 — rather than 25 per cent of your entire pot. However, those who previously took out lifetime allowance protections may still be able to retain access to a higher tax-free lump sum entitlement while also recommending pension investing.’
Budget a win for senior professionals
West agrees it is a nuanced picture, but will improve things for several key groups of high-earning workers.
‘The tests carried out by HMRC are horrendously complicated,’ she says. ‘A lot of senior professionals, particularly women returning to work, have been disincentivised by the restrictions in the AA – especially when returning to the work place.
‘This also offers a huge boost to those in superannuation schemes, such as senior medical professionals and civil servants in the public sector. They have been very unfairly penalised by the rules.’
As ever with Budget announcements, the devil will be in the detail, which should emerge in the coming days and weeks. ‘We will have to see whether there are any changes to the taxation of death benefits and any changes to how pensions are treated for inheritance tax,’ adds West.
James Quarmby, partner and head of private wealth at international law firm Stephenson Harwood, was less excited about the abolition of the LTA.
‘The abolition of the lifetime allowance for pensions looks exciting but isn’t really since the amount you can contribute each year has only crept up a little (from £40,000 to £60,000 for middle income earners and from £4,000 to £10,000 for high earners).
‘If you’re a high earner it therefore means that you have no chance of ever reaching the old lifetime allowance anyway, so abolition of the limit is a moot point.’
He zeroed in on more ‘anti-avoidance measures’ announced by the chancellor, including a doubling of the prison sentence for evasion (seven years to 14 years) and more legislation targeted at ‘promoters’ of tax avoidance.
‘We have seen much illiberal legislation from the government in the last few years targeting advisers, in an attempt to scare them off facilitating tax avoidance,’ he adds.
How does abolishing the Lifetime Allowance impact divorce?
The end of the LTA could have another effect — on divorce proceedings. ‘An unintended impact of the abolition of the LTA may be to make HNW pension negotiations more complex,’ says Matthew Taylor, partner at Stowe Family Law.
‘Whereas previously, pension sharing could be an attractive settlement route as it could minimise or eliminate tax paid as a result of the LTA, that advantage no longer applies which may lead to more arguments about whether pensions should be shared or not.’
It is now even more important for parties – particularly the non-pension holding spouse — to take legal and financial advice before finalising any settlement.
Elephant in the room
Fiscal drag, which pulls workers into higher tax bands as earnings rise, was the great unspoken theme of the Budget, Quarmby believes.
‘He’s done this with income tax and also capital gains tax (CGT), in halving then halving again the annual allowance for CGT,’ Quarmby says.
‘You’ve heard of Ru Paul’s Drag Race — well this is Jeremy Hunt’s version – just without the frocks.’
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Will Wainewright is the founder of hedge fund and private markets news site Alternative Fund Insight
Cover image: Getty
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