What a difference a year makes. Jeremy Hunt has just ripped up his predecessor’s statement, writes Bethell Codrington, director of TMF International Pensions.
Rishi Sunak, the then Chancellor, famously stated in March 2022 that “the lifetime allowance (LTA) limit would be frozen at its current level and would remain frozen until April 2026”.
What is the Lifetime Allowance?
Introduced originally in 2004, the LTA is the amount that can be saved in all UK pension schemes without incurring a tax charge.
Gordon Brown and the Labour government in 2006 set a limit of £1.5m which rose over five years to £1.8m ($2.25m, €2m). In 2012, it was cut to £1.5m and over successive years was cut further by the Conservatives to £1m by 2016.
After 2016, the figure was legislated to rise by inflation. However, by 2020, it had only grown to £1.073m.
Pension contribution limits for tax relief were £215,000 per annum in 2006 and went up to £255,000. They then fell under the Conservatives to £40,000 per annum and Hunt has now confirmed that the limit will increase to £60,000 per annum – but only tax relievable if you earn less than £260,000 per annum.
We should all be rejoicing with the removal of the LTA, it is great for everyone. Here comes the but.
The Labour Party, currently in opposition but far ahead in the opinion polls for next years’ general election, have already vowed to reverse the policy and re-introduce the LTA if elected.
Not to mention that in the past 20 years or so, history has shown that pensions have been abused by the Treasury and changed, seemingly at will from year to year, offering no comfort that the abolition of the LTA will stick longer term.
One of the main reasons Hunt announced this measure is that there is a major issue with doctors, surgeons, dentists and other NHS staff retiring early, as their state funded final salary pensions start exceeding LTA calculations. What is often missed out is that an awful lot of civil servants in Whitehall also have the same problem.
Politically, Hunt hopes this measure will help retain or convince these workers to return to the NHS. Politically however, this may backfire. According to ONS (Office for National Statistics) in 2021, less than 2% of individuals in UK have Pension pots over £1m. Cannon fodder for Labour as Conservatives historically give more tax breaks to the rich.
Why did Hunt not simply re-introduce the inflation link and back date it? The LTA would now stand near £1.233m.
How this effects the Qrops market?
It would be disingenuous to say there will be no effect to the Qualified Recognised Overseas Pension Scheme (Qrops) market, especially until the dust settles, and everyone has had the time to digest and understand what the changes mean to them.
However, the changes will most likely have an effect, if at all, at the ‘retail’ end of the market, where unfortunately, the Qrops market has seen most of its issues in the past, with unregulated advisers using products paying high commissions hidden from their clients through complex charging structures.
For those looking to move abroad and who will comply with the rules to avoid the overseas transfer charge, why would you leave your pension in the UK?
Transferring to a Qrops protects you from future meddling and the uncertainty of the constant chopping and changing for political gain which has been prevalent in the last couple of decades.
Clients can also avoid having their income taxed using an emergency tax code or having to battle with the HM Revenue & Customs (HMRC) for a NT tax code, to be able to get their pension payments paid to them without tax being levied at source and having to reclaim it, where they are no longer UK tax resident.
A Qrops in places like Malta can potentially pay benefits out Gross, assuming there is a working double taxation agreement with the country of tax residence of the client. Clients would, naturally, then need to declare this income in their country of tax residence.
For those not yet ready to move but are concerned about a future Labour Government and their plans to re-introduce the LTA, why not transfer what you have now and lock that outside of the UK and keep contributing to a UK pension?
With no effective LTA past 5 April 2023, why not take advantage and effectively protect your pension from any future changes?
Do you trust the government of the day not to change the rules again, or, that if Labour are elected, they won’t re-impose the LTA? And if they do, at what amount?
Unfortunately, history has a habit of repeating itself. What is important is to have an open and honest consultation with a suitably regulated adviser who really understands pensions and Qrops.
Qrops are not suitable or even necessary for everyone, but they still have an important part to play in pension planning, especially for those looking to retire abroad.
This article was written for International Adviser by Bethell Codrington, director of TMF International Pensions
