There has been speculation that the new government will lift the lifetime and annual tax allowances on pension saving, after chancellor Kwasi Kwarteng said on Friday he wanted to make tax simpler. 

 

The Sunday Telegraph reported that Kwarteng and prime minister Liz Truss are planning to cut taxes further in the new year. They announced sweeping reductions last Friday, including scrapping the 45% tax rate and reversing a 1.25% increase to national insurance. 

   

   

The newspaper cited “those familiar with discussions” as saying that the Treasury considers lifting the LTA a good way to keep doctors and other high-earning public sector employees working. The allowance is currently set at £1,073,100 and has been frozen at that level until 2026. 

 

 

Doctors have in the past few years lobbied extensively for changes to pensions taxation, claiming the current system forces senior doctors to stop working or reduce their hours to avoid paying the 55% tax charge for breaching pensions tax allowances.  

 

Provider Aegon is now also calling for an increase in the limits, saying at a time of rampant inflation it was important for the future of the pensions system and the retirement livelihoods of hundreds of thousands of individuals. Lifting tax thresholds would likely have the effect of increasing the funds flowing towards the pensions industry’s products and the fees associated with them. 

  

The tax allowance limits “need an urgent overhaul”, said pensions director Steven Cameron. “While we didn’t expect any changes in last week’s Mini-Budget, we very much hope this is now moving up the chancellor’s in-tray.” 

  

Aegon said if inflation averages 10% next year and falls back to 5% for the following two years, the real-terms value of the lifetime allowance will have fallen by over 20% by 2026. If it were to increase with the assumed inflation figures instead, it would reach £1,348,700 by then.  

 

Someone fortunate enough to reach that level would have to pay a £151,580 tax charge under the current system, “just when they need their full pension more than ever to fund a comfortable retirement and cover potential future social care costs”, claimed Cameron. 

 

   

    

Aside from the lifetime allowance, the annual allowance is also a thorn in the side of many high earners with defined benefit pensions. The annual allowance stands at £40,000, where it has been since 2014. Higher earners’ allowance tapers off, with the lowest possible allowance being £4,000.*

 

In 2020, as it became clear the Covid-19 virus would put pressure on the health system and after doctors had already lobbied for a change, the government increased the threshold income for the tapered annual allowance substantially to keep doctors accepting shifts. The threshold income nearly doubled to £200,000 from the previous £110,000, and the adjusted income limit also jumped from £150,000 to £240,000.  

 

At the time, the government said the changes would lift over 90% of doctors, and many other high earners on DB pensions, out of the TAA. The cost of this tax break for high earners was estimated at £180m in 2020-21, rising to £670m in 2024-25, with the exchequer losing a total of nearly £2.2bn by 2024-25. 

 

   

Aegon’s Cameron also wants to see the money purchase annual allowance increased. This limits tax-free pension contributions to £4,000 once someone has accessed a pension pot, with the intention of preventing people ‘recycling’ money through the pension scheme for tax purposes, though industry claimed that there was no evidence of this happening when the limit took effect in April 2015. 

  

“We’d urge the government to increase the MPAA to ensure people who have been adversely affected by the pandemic and cost of living crisis are not left disadvantaged in their ability to rebuild their pension savings,” he said, suggesting a limit of at least £10,000. “Bringing it fully into line with the annual allowance would also be a welcome simplification,” he added. 

 

Others agreed that the lifetime allowance should be reviewed. The lifetime allowance "makes the pension tax rules people interact with unnecessarily complicated, adding to an already confusing picture. If we want people to save more for retirement, we need to make the rules as simple as possible,” said Tom Selby, head of retirement policy at investment platform AJ Bell. 

 

He said the LTA had been “at the heart of the current NHS crisis”. The Treasury has already proposed a specific solution for the NHS scheme, but Selby said the LTA also presented wider challenges.  

  

“In defined contribution schemes, the lifetime allowance risks punishing those who take investment risk and enjoy long-term growth as a result of taking that risk," he said. While increasing the lifetime allowance “would help”, he went further, saying that “there is an argument for scrapping it altogether – certainly in DC – and controlling pension tax costs with a single annual allowance”.