Lifetime Allowance uncertainty helps no one

As Benjamin Franklin famously said, “in this world, nothing is certain except death and taxes”, and when it comes to the realm of pension saving in the UK this is certainly true.

Tinkering with the rules is an all-too-common occurrence, and uncertainty makes it difficult to plan for, or advise on, the best course of action, especially when you consider the timescales involved in what is the most long-term of savings plans.

The latest changes highlight the issue only too well. No sooner had the Chancellor sat down from delivering this year’s Budget with its shock announcement of scrapping the Lifetime Allowance (LTA), than the opposition stood up and said they’d reinstate it.

When the subsequent Finance Bill came out we analysed the details of how the changes will impact those crystallising benefits in the 2023/24 tax year and shared our findings with advisers. We also looked at what we know (and largely don’t know) about what will happen in 2024/25 onwards when the LTA is due to be scrapped completely, not just the associated tax charge as is the case this year.

But perhaps the most frequent discussion point is around what happens if Labour gets in and the changes are reversed. Should clients crystallise funds in excess of the LTA now whilst there is no tax charge? Would this stop them being tested again if Labour re-introduces the LTA? Or would it mean that only growth would be tested at age 75? What about those with Enhanced or Fixed Protection who can now make contributions – should they take advantage? But what are the consequences if their funds are larger, and the LTA makes a comeback?

I don’t have the answer to these questions – and I don’t think anybody does. HMRC has set up a working group to work through the detail of the full abolition of the LTA and the impact on legislation and processes. As it has not yet been finalised how the rules will be removed, I am confident no one has worked out what any potential re-instatement would look like. We do know though that when the LTA was first introduced, and at every reduction since, there have always been protections – and those have been brought in under governments of both colours (plus the coalition).

Whilst death is certain, and some taxation of pensions will always occur, the chances of the rates and application remaining consistent are slim whilst we have politicians making the decisions. The latest changes only strengthen the call for an independent pension commission to steady the ship and build confidence in rules that won’t change with the wind.