There was good news for pension savers in yesterday’s Budget.
Chancellor Jeremy Hunt increased the pensions annual tax-free allowance by 50% from £40,000 to £60,000, - and has also abolished the lifetime allowance.
Susie Walker, head of tax at Johnston Carmichael, said the pension-legislation changes were clearly designed to get people working longer across the country, as well as encouraging early retirees back into work to boost productivity and the economy.
She added: “Many high earners – particularly in the NHS – have retired early on account of their pension funds being capped.
“Not only will there be a tax benefit for those returning to work and restarting their pension contributions, but those in existing employment will also now be able to add greater sums over their career.
“Mr Hunt went further than expected in deciding to abolish the lifetime allowance (LTA) entirely, but he is clearly trying to address these wider issues and hopefully ease stress on our health service in the process."
Listened to concerns
The chancellor told MPs he had listened to the concerns of many senior NHS clinicians who said unpredictable pension tax charges were making them leave the NHS just when they were needed most.
"I do not want any doctor to retire early because of the way pension taxes work. I have realised the issue goes wider than doctors. No one should be pushed out of the workforce for tax reasons."
Mr Hunt said his pension-tax reform would stop over 80% of NHS doctors from receiving a tax charge, incentivise most experienced and productive workers to stay in work for longer, and simplify the tax system - taking thousands of people out of the complexity of pension tax.
Kevin Mackenzie, of Acumen Financial Planning, said it was surprising that the government had decided to completely abolish the LTA.
He explained the history of the allowance: “Introduced in 2006 at £1.5million, the LTA steadily increased to £1.8million by 2010.
“Since then, the LTA has been subject to government reductions and a more recent freeze, and currently stands at £1,073,100.
Impacted
“As a result, many more people saving for retirement have been impacted by higher tax charges.
“Abolishing the LTA will mean that many people can continue to save for retirement and draw their pension more tax-efficiently, without facing additional tax bills of 55%.
“Coupled with the increase in annual allowance to £60,000, we now have a far-more attractive pension framework after the Budget announcement.
“Since pension freedoms were introduced in 2015, unspent money-purchase pension funds can be passed to selected beneficiaries and outside of an estate for Inheritance Tax purposes.
“Abolishment of the LTA will also be welcome news for those that use their pension fund to mitigate Inheritance Tax, using the pension as a vehicle to protect family wealth.”