Industry experts have welcomed changes to pension allowances announced as part of the government's Spring Budget, although concerns have emerged around the lack of support for lower earners, and the potential for continued complexity.

AJ Bell head of retirement policy, Tom Selby, highlighted the Chancellor's speech as a “pensions tax-cutting bonanza far beyond anyone’s pre-Budget expectations and the most significant retirement policy intervention since the 2015 ‘pension freedoms’”.

He stated: “Taken together, these pension tax cutting measures amount to a colossal boost to savers and retirees and send a clear message to hard-working savers that the government is now firmly on your side.”

The Pensions and Lifetime Savings Association (PLSA) also welcomed the changes, stating that increasing the lifetime allowance (LTA), annual allowance (AA), and the money purchase annual allowance (MPAA), will encourage older, often highly skilled or experienced workers, to stay in the workforce and provide more flexibility for retirees to re-enter the world of work.

“These changes will also allow additional scope for savers to contribute lump sums, perhaps from an inheritance or a redundancy payment, into their pension to meet any shortfalls before they retire," PLSA director of policy and advocacy, Nigel Peaple, stated.

A 'sea-change' moment for higher earners

Adding to this, LCP partner, Steve Webb, described the changes as a "sea-change in government policy" that will set millions of people free to save more into pensions, predicting a "flood" of new money into pensions from higher earners.

Cushon director of policy and research, Steve Watson, also highlighted the announcement as a “major boost” for pension savers, arguing that the government needed to act to
ensure that the real value of the allowances weren’t further eroded,” he stated.

“Previously, those on middle incomes were at less risk of exceeding the limits but in recent years there has been a spike in these individuals exceeding the annual and lifetime allowances," he explained. "This was acting as a deterrent and preventing many people from saving towards the retirement they want.”

And the benefits could be felt by savers for decades to come, according to Legal & General Investment Management co-head of DC, Rita Butler-Jones, who also highlighted the changes as a "clear signal to younger savers".

"As we live and work for longer, an increasing number of people were at risk of being caught out by the pensions tax trap," she continued. "These sensible measures - combined with the government’s recent support for expanding auto-enrolment - will help to incentivise long-term saving for all.”

Group Risk Development spokesperson, Katharine Moxham, pointed out that the decision to abolish the LTA also positively impacts on group life assurance schemes, which are employer-sponsored death benefits provided to employees.

She continued: “Most group life assurance arrangements operate within HMRC’s regulatory framework for a ‘registered occupational pension scheme’.

"Lump sum death benefits, when combined with the value of any registered pensions can normally be paid tax free, but only up to the LTA, so removal of this restriction will be very welcome for employers and employees alike. This will also save employers significant administration costs."

Aon associate partner, Catherine Pearce, also suggested that the changes could be particularly beneficial for Local Government Pension Scheme (LGPS), with "far fewer" LGPS members expected to breach the AA.

"Not only will scheme members be pleased but LGPS administrators will also welcome the reduction in the number of members needing to be issued with a Pensions Savings Statement. That will allow them to focus on other developments such as the McCloud remedy and dashboards.”

Tapering concerns

However, concerns around the impact of pension tax more broadly have remained, as Pensions Management Institute (PMI) president, Sara Cook, argued that the government missed an opportunity in relation to the tapered annual allowance (TAA).

"Having abolished the LTA, the government could have abolished the TAA, which continues to be unpopular throughout the pensions industry and also among the general public," she stated.

"The tax revenues gathered through the TAA must now be so small that its retention seems hard to justify. The Chancellor has missed an opportunity to abolish a measure that has few admirers.”

Agreeing, Quilter head of retirement policy, Jon Greer, said that the TAA still provides a disincentive for higher earners and those in DB pensions to work more, "and signals to them that normal pension provision is not designed for them".

A push back to work?

Adding to this, Hymans Robertson senior DC consultant, Hannah English, questioned whether these changes alone will meet the government’s objective of encouraging the over 50s back in to the workplace, suggesting that a more effective mechanism for getting the over 50s back to work is likely to be general taxation.

Indeed, Isio director, Iain McLellan, argued that while the changes are good news for higher earners and those who were not thinking of retiring anytime soon, recent retirees may not want to give up the flexibility and lifestyle they have in retirement to go back to work.

“There was some speculation that the Chancellor would look outside of taxes and increase the state pension age ahead of 2044,” MLellan stated.

“If the tax changes don’t have the desired effect, this could remain on the agenda for Budgets to come. What is certain is that for many there is a golden opportunity right now.”

More broadly, English also stressed that government policy with respect to the LTA or AA over the past 12 years has made it "impossible for individuals to effectively plan for retirement".

Echoing this, the Association of Consulting Actuaries (ACA), emphasised the need for pensions tax policy to be "stable and predictable" to enable individuals to make rational decisions about when they make pension savings and how they draw them.

"In recent years, the unpredictable changes from year to year in LTA and AA has led to cliff edges and unexpected outcomes in real-life situations," ACA pensions tax committee chair, Karen Goldschmidt, stated.

"We hope the change of approach is one all the political parties can warm to so we return to having a holistic long-term approach to pensions tax relief. There are some knock on impacts on some areas that are not all clear (e.g. tax free cash sum) - savers will need more detail urgently.”

These concerns have also been heightened following the news that Labour would look to reinstate the LTA if elected, with Canada Life technical director, Andrew Tully, arguing that "you simply can’t play political ping pong with the pensions system".

The devil in the detail

Broader calls for further detail have also been made, as Barnett Waddingham self-invested technical specialist, James Jones-Tinsley, said that the Chancellor "must offer clarity, and quickly, on what happens to retirements currently being processed, and the impact assessment on retirement savings".

"Whether behaviours change and people get back to work will depend on if they think the change is here to stay, or whether future governments can reintroduce the allowance at a later date," he continued.

"It is also unclear why the charge is being removed in April 2023 but the allowance wont be abolished until April 2024 - if the abolition of the allowance requires primary legislation to pass, Labour may look to stonewall the bill as it favours the wealthy. In that case, it may well become an unfulfilled promise in the next few months."

In addition to this, Watson argued that while removing one aspect of the complexity around pensions is welcome, “there is much more that needs to be done to simplify the pensions tax relief system".

DeVere Group CEO, Nigel Green, echoed these concerns, warning that, “beyond the headline-grabbing statement, the detail has served only to make an already highly complex regime even more so, meaning those wishing to take advantage of this new development should seek advice in the first instance.”

“Whilst the Chancellor’s announcements are something we champion, the system has just become considerably more complicated. A much-needed wider review of the pension tax regime, which has become increasingly and unnecessarily complex in recent years, is long overdue and should have also been a priority for Mr Hunt.”

Adding to this, National Pensions Trust head, Paul Armitage, stated: "While at first glance it is pleasing to see a budget that focuses on improving longer term savings incentives, we are concerned that the constant chopping and changing of the pension rules just leads to complexity and confusion.

“We need a cross party consensus that puts pensions saving, and in particular tax relief, on a long-term footing. If this gets reversed early in the next Parliament then these changes will have been pointless and arguably would have done more harm than good.”

Concerns for 'generation DC'

Concerns have also emerged around the lack of support for lower earners, as People’s Partnership director of policy, Phil Brown, warned that the measures “will do nothing to solve the problem of under-saving in the UK”, arguing that reform to workplace saving will be the "only way to ensure that millions more people can save enough to live on in retirement".

The Investment and Savings Association (Tisa) head of retirement, Renny Biggins, agreed that the changes will have “little impact on most individuals and households whose typical annual contributions and total pension entitlements fall well short of these limits”, warning that there is a "looming pension crisis ahead for generation DC".

"Many consumers will have no option other than to work for longer, not because the thresholds enable them, as the proposed measures would suggest, but simply because they won’t have enough wealth to retire," he added.

“The government needs to consider how to improve the pensions savings amongst lower earning individuals and how to make the spread of tax relief and incentives more equitable.”

In light of these concerns, Eversheds Sutherland partner, Emma King, suggested that calls to help those at the other end of the pensions savings spectrum (such as raising employers’ auto-enrolment minimum contributions) will become even louder.

“Will the result be a “quid pro quo” of some sort, designed to recoup some of the cost to the revenue of more generous pensions tax allowances?" she queried.

"Could this be further increases to the normal minimum pension age and/or state pension age, a change to the inheritance tax treatment of DC pots or amending the rules around tax free lump sums?”

Awaiting results

“Whether these measures will succeed in retaining more early retirees in the workplace remains to be seen, as such changes will involve an unwinding of years of legislation," added Mercer chief actuary, Charles Cowling.

"The devil is undoubtedly in the detail but these measures appear to be the first real endorsement of pension savings for years.”

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