Tax-free cash will not be given assets above the current £1,073,100 lifetime allowance, for the first time breaking the principal that 25 per cent of all pension assets can be paid out tax free.
Chancellor Jeremy Hunt’s abolition of the lifetime allowance, increase in the annual allowance from £40,000 to £60,000 and increase in the Money Purchase Annual Allowance from £4,000 to £10,000, have been broadly welcomed by pension professionals. But advisers have questioned whether the limit of tax-free cash to the original LTA, marks the beginning of a real-term erosion of the 25 per cent lump sum. Tax-free cash will be limited to £268,275 under the plans.
The Ink Group managing director Billy Johnson says: “My concern here is that the fundamental principle that 25 per cent of pension is paid tax-free has been broken. Once the genie is out of the bottle it is very hard to get it back in. Will we see the government freeze the tax-free cash element for ever, which means it gets smaller in real terms as a result of fiscal drag?”
Steven Cameron, pensions director, Aegon says: “The Chancellor pulled a massive rabbit from his Budget hat by scrapping the Lifetime Allowance, rather than a rumoured increase to £1.8m. This comes at the same time as the Annual Allowance is being increased by 50% from £40,000 to £60,000, and the Money Purchase Annual Allowance being raised from £4,000 to £10,000.
“It has always been excessive to have both a lifetime and annual allowance, effectively limiting not just how much can be paid in each year but how much you can hold on a tax favoured basis in total. With most people now in a defined contribution rather than a defined benefit scheme, it makes sense to focus on setting a limit on contributions rather than ultimate benefits. In a defined benefit scheme, having a lifetime allowance meant those who saved diligently could end up facing a tax penalty if they achieved good investment returns.
“Removing the lifetime allowance will also cut out a swathe of complex pensions tax rules. It will allow individuals who have stopped contributing for fear of exceeding it to consider restarting contributions. It may also, subject to any detailed provisions, allow people who have already started taking benefits to top these up.
“Not surprisingly however, the amount which can be taken tax free will be restricted to 25 per cent of the current Lifetime Allowance of £1,073,100 or £268,275. Allowing 25 per cent of an unlimited pension pot tax free would have been excessively generous.”
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