Whilst the limit had been raised twice before, advisers often focused on further reductions as a threat, for clients with larger pension funds, to take action. Could advisers now to do a volte face and suggest with the LTA abolition pension transfers are not required, especially with large defined benefit schemes.
However, there are a couple of issues with the increase, not least of which has been the opposition party’s response. The Labour Party started by not responding at all at the time of the budget because they were so wrong footed (they had been calling for the rise themselves for key workers such as doctors). Then they stated that they would repeal this legislation if elected. Within 48 hours they updated their views to retain the LTA but not for Doctors, but this then changed to other “key workers” or maybe having 2 different LTA rates!
The constant adding of ‘layers of simplification’ only makes retirement planning more uncertain. The opposition parties response has muddied the waters and is seen as unhelpful as the general view is that both parties should really be treating pension planning for the long term, not a political football.
So, while on the face of it this will simplify pension planning for those with substantial accrued DB pensions and larger DC funds, consideration to who could be in power after the next election becomes a key issue.
Who is impacted therefore?
While the original intention for the removal of the LTA was considered to be the reduction of early retiring NHS professionals and other long-serving employees in public service, the beneficiaries of this Budget are going to also include high earners that may now consider remaining in the workforce too.
It could be argued that this budget was largely for those in retirement, approaching retirement and for families with young children, and the Government’s message of ‘Get Britain Working’.
What will change?
Looking at the mains changes only, the LTA will be removed from 6th April 2024, for the next tax year LTA checks will still be undertaken but there would be a 0% tax charge on any excess. The Pension Commencement Lump Sum (PCLS) will be limited to 25% of the current £1,073,100 LTA- at this stage it does not appear to be indexed.
Pensions from before 2006 will still have their PCLS rights protected (where they may be greater than 25%) and those with later protections will be able to contribute again to their pensions without losing those protections. Many who did not join new employer-sponsored pensions, as they had hit the LTA limit, will feel encouraged to do so.
Further, the annual allowance is to be increased from £40,000 to £60,000. Very high earners will still be affected by the tapered reduction down to £10,000 for those earning over £260,000. The MPAA (Money Purchase Annual Allowance) will be increased to £10,000
Clearly, anyone with funds in excess of the LTA should wait until accessing benefits until 6th April. There will be some losers over this period, namely those that reach 75 or die before that date. And, we are hearing of a few ‘miffed’ investors that have recently paid substantial amounts of LTA charges with no way to reclaim them. However, this always happens at budgets.
This is often one of the main subjects discussed by cross-border workers with UK pension rights and their advisers.
Those with Fixed or Enhanced Protection should be able to transfer without losing protection. However, given that one of the main drivers for recommendations to transfer to QROPS (Qualifying Recognised Overseas Pensions) was to avoid LTA charges then this will surely reduce the numbers considering QROPS. However, the DTAs and country specific rules on PCLS may still leave the door open, given the restriction of the PCLS to the current LTA.
This will account for a very few transfers in reality, and one of the main losers will be recommendation to transfer from a defined benefit scheme to a QROPS. The advantages of QROPS over a British pension largely removed for around 98% of transfers.
The issue of local taxes, such as Wealth Taxes, may still focus minds but without clarification on specific large tax benefits, which for the majority of people who are not HNW, it may not apply.
Where there may be a growth market is the return of QROPS to British pensions! With many advantages of flexibility for people with pension less than £1,000,000 it could easily be argued that the loser of this budget is QROPS providers.
Time to Review?
There is no doubt that this will change some pension investors’ plans for retirement and advisers need to reconnect with those it may affect. There may also be a case to review previous QROPS advice to see whether retaining the QROPS or reversing it to a UK registered pension is the most suitable option.