This year’s budget has puzzled me more than anyone else. I still don’t understand why the seemingly conservative Prime Minister Jeremy Hunt abandoned a decade of pension tax policy and effectively said “stop”. you can’t.
Abolishing the LTA and significantly increasing other pension savings benefits such as annual allowances from 50% to £60,000 is the job of a radical prime minister. I’m starting to wonder if there’s a secret extremist among us.
Could there be a prime minister willing to take some risks behind his cool and controlled exterior? Who wants to do away with long-established conventions?
Interestingly, in 2021 it was his boss who implemented a five-year tax base freeze, including an LTA freeze of £1,073,000 until at least 2026. Introduced just two years ago. Those who suggest a lack of coherence in pension policy may be controversial.
The impact of the LTA ax and other pension changes is slowly being absorbed by industry pundits, and there is no doubt that it will open up all kinds of new profitable avenues for planners and their clients.
One obvious change is that wealthier people and those already retired will be encouraged to save more of their pensions in order to enjoy the tax benefits they offer. Pension providers rub their hands, but this doesn’t get around the fact that many people are cutting back on their pension savings to lower income levels just to keep the lights on. .
Eliminating LTA has other benefits, such as opening up the potential for significant IHT mitigation. Annuity pots are typically not eligible for IHT when transferred, so why not stuff cash into an annuity instead?
One thing is clear, though. If Mr Hunt wants his LTA to end, his timing is right. More people were covered by his LTA, with about 42,350 facing his LTA tax penalties in 2019/20. The amount of tax penalties have been set for him to exceed £1.5 billion by 2025. Withholding this income has become more difficult. Penalty players will thank him too.
Many doctors and high-income individuals who have violated the LTA are grateful as well. They will be able to continue with their pension savings without fear of penalties, which may allow some to keep working a little longer. It doesn’t matter.
I think there will be bigger gains for the thousands of people with pension pots approaching the LTA. Many of these people would be delighted to be able to put more money into their pension.
Of course, if something seems too good to be true, it’s always pricked on the tail. First, Hunt changed the rules for pension tax-exempt cash. Instead of capping his 25% of the fund, he has now moved it to his £268,275, effectively introducing a new pension cap (I said he was radical ). Ostensibly he did this to stop tax-free cash from becoming virtually unlimited, but it’s a strange move and deserves further consideration. maybe not.
Another sting comes from Labor, who promised to reverse the LTA’s ax when it comes to power. This will help differentiate Labor on pension policy, but it could cause big disruptions to pensions in the future. Its implications are not yet fully understood, but this could undermine LTA’s axe.
So where do I stand on all this? I’m in favor of pension savings, so anything that encourages it is a good thing. However, it is a fallacy to say that only the very wealthy will benefit. Many business owners and executives, hard-working ordinary people have amassed £1million pension pots after decades of hardship, so in my book, give them a retirement boost. is no problem.
What’s more important is what happens next. If the new pension changes are just an excuse for large-scale tax evasion, they will quickly lose public support, so the pension sector should handle the changes carefully to ensure as much profit as possible. there is.
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Kevin O’Donnell is the editor of Financial Planning Today and has worked as a journalist and editor for over 30 years.