What is the lifetime allowance for pension savings and why is being scrapped?
The lifetime cap on pension saving is to be abolished, after Chancellor Jeremy Hunt unveiled a package of reforms designed to encourage older people to return to the workforce in his Spring Budget.
The lifetime allowance (LTA) caps the total amount a person can save in a pension without having to pay extra tax.
Labour leader Sir Keir Starmer described the move as a “permanent tax cut” for the wealthy.
Mr Hunt also unveiled an increase in the pensions annual tax-free allowance, from £40,000 to £60,000.
Some pensions experts pointed out that millions of workplace pension savers will feel no impact from the measures.
So what is the lifetime allowance? Here is everything we know.
What is the lifetime allowance for pension savings?
The lifetime allowance for pension savings refers to the amount of money Brits are legally allowed to save in their pension schemes before they have to pay tax on it.
The lifetime allowance has stood at £1.07 million, with savers incurring tax after that personal pension pot threshold has been exceeded. People were expected to be able to save up to £1.8m over a lifetime.
“In the face of severe global challenges, the UK economy has proved more resilient than many expected, but there is a long way to go."
Chancellor @Jeremy_Hunt responds to statistics this morning from the @ONS which show 0.3% GDP growth in January 2023. pic.twitter.com/VhcG0LrIBB
— HM Treasury (@hmtreasury) March 10, 2023
Why has the lifetime allowance been scrapped?
The move was aimed at addressing the issue of workers — particularly doctors — reducing their hours or retiring early due to hitting their tax-free pension quota.
UK economic growth has stagnated in recent months and the Bank of England expects the UK to enter a recession this year. About a quarter of people of working-age — around 10 million people — do not have jobs.
The Government’s says that by scrapping the allowance, Brits will stay in the workforce for longer — without being put off by having to start paying taxes on their pension contributions. This has been a particular issue in the medical sector, with doctors and consultants reducing their hours in the NHS to avoid going over their allowance.
Persuading workers to work for longer is part of UK plans to boost growth. Mr Hunt’s announcement on tax and spending on Wednesday was called the “Back to work Budget”.
The Government has been looking into how it could encourage retired, middle-aged workers to rejoin the workforce and support the economy. Mr Hunt said earlier this year he “would look at the conditions necessary to make work worth your while”.
Speaking in the House of Commons on Wednesday, he said: “I do not want any doctor to retire early because of the way pension taxes work. Some have also asked me to increase the lifetime allowance ... But I have decided not to do that.
“Instead, I will go further and abolish the lifetime allowance altogether. As Chancellor, I have realised the issue goes wider than doctors. No one should be pushed out of the workforce for tax reasons.”
But Sir Keir said only the “very wealthiest” would benefit from the lifetime allowance change.
“The only permanent tax cut in the budget is for the richest 1 per cent,” he added. “How can that possibly by a priority for this government?”