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Budget 2018: Lifetime allowance nudges up as Hammond bucks pension tax reform rumours

Philip Hammond - UK Parliament official portraits 2017

The lifetime allowance for pension savings will increase slightly more than expected next year to £1,055,000, according to Budget documents published today.

Initially the lifetime allowance was meant to increase in line with September’s figures for the Consumer Price Index to £1,054,800.

But the government has rounded up the lifetime allowance slightly more than originally expected.

In an otherwise quiet Budget for pensions chancellor Philip Hammond made no radical changes and kept the annual allowance unchanged at £40,000.

Earlier in the month The Telegraph reported a senior Treasury source confirmed tax free contributions would be stripped back to unlock the extra cash for healthcare.

In June the government promised to spend an extra £20bn annually on the NHS by 2023 and, in July, reports surfaced the government was considering how this could be done.

It is understood the Treasury started to investigate the flat-rate proposal, with some estimating a single rate could raise an additional £4bn in revenues.

Tax relief is currently assigned in line with a person’s marginal rate of income tax, which distributes relief towards higher earners and costs the government around £40bn a year.

A flat rate of 28 per cent has been proposed by the Resolution Foundation to help millennials save for later life and the Royal Society of Arts has suggested a 30 per cent rate to help the self-employed.

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There are 3 comments at the moment, we would love to hear your opinion too.

  1. philip mcqueeney 29th October 2018 at 6:10 pm

    My pension pot is in excess of £1.03m. Would I still have to pay on crystallization if I became a Spanish resident?

  2. A pity he didn’t scrap it altogether or, failing that, at least restore it to its previous highest ever level. Restricting both input and output has always been widely resented as a manifestly unjust penalisation of those with the means to make even moderately sizeable contributions.

    Young people starting out now with quite modest contributions are on target to breach the LTA decades before they reach their retiring age, even allowing for CPI-linked increases. This is easy to see just by comparing the inflation-adjusted projected funds on illustrations against the current LTA. As a result, any recommendation to embark on a PP has to be accompanied by a warning that many years before the client’s expected retiring age is reached, to avoid exceeding the LTA and running into tax penalties, they’ll have to suspend contributions, apply for one of the multitude of protections and look to an alternative vehicle from that point on.

    Even the funds of those who’ve been auto-enrolled into a basic workplace scheme may well breach the LTA eventually.

    On the one hand, the government claims to be keen to encourage people to save towards a decent level of retirement income and trumpets the success of AE workplace schemes whilst, on the other, it retains restrictions that positively disincentivise people to do so. How can it POSSIBLY consider that to be a satisfactory basis for recommending engagement with any sort of retirement savings scheme?

    And, to make matters even worse, people can now cash in their retirement funds from age 55 onwards, potentially incurring a nasty tax hit on three quarters of them. Anecdotally, many who do so either leave the proceeds in cash or blow it on something like a new kitchen. It’s crazy.

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