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UK Government Abolishes Lifetime Allowance: Encouraging Retirement Savings for All

September 12, 2023

The announcement by Chancellor Jeremy Hunt during the March Spring Budget regarding the lifetime allowance has caused quite a stir. While there were rumours circulating prior to the announcement that there would be an increase in both the annual allowance and lifetime allowance, what surprised the country was not only the removal of the lifetime allowance charge but the abolition of the lifetime allowance altogether.

So, what exactly is the lifetime allowance? It is the total amount of pension benefits that one can accumulate in their lifetime in a pension scheme before they need to pay a tax charge. The standard lifetime allowance was previously set at £1,073,100, and any pension benefits that were above this amount were taxed at the appropriate rate. However, as of 6th April 2023, the charge has been removed, and by 6th April 2024, the lifetime allowance will be abolished.

The decision to abolish the lifetime allowance is aimed at encouraging people to stay in work for longer. Highly skilled workers, such as Doctors in the NHS, were choosing to leave their position because they were accumulating a large pension pot and paying tax on the excess. The hope is that by removing the limit, the Government can incentivise and encourage workers, especially medical professionals, to stay in employment for longer and to pay into their pensions to save for retirement.

Moreover, the annual allowance, which is the gross amount that one can pay into a pension each year and receive tax relief, has been increased from £40,000 to £60,000. This move is also aimed at motivating people to save towards retirement and reducing the amount that high-earning doctors, in particular, are paying on an annual allowance charge, which could incentivise them to continue working.

The tapered annual allowance, which puts limits on the amount of tax relief one is eligible for on their pension contributions, has also been revised. The taper will start for those who earn between £260,000 and £360,000, and the new tapered allowance is £10,000, which is another move aimed at convincing high-earning doctors to stay in employment and contribute to their pensions.

The Money Purchase Allowance, which restricts how much a person who has flexibly accessed their Defined Contribution pensions can contribute, has also been increased from £4,000 to £10,000. This decision was made to encourage those who are accessing their pensions early to continue to stay in work, and for those who have retired, to motivate them back into the workplace.

Overall, these amendments are seen as positive changes to the pension system, and while the primary driving factor is to encourage high-earners back to work, whether retired or not, it allows individuals to build up a significant amount of wealth in preparation for their retirement. It’s an encouraging sign that the Government is acknowledging the changing circumstances of individuals and trying to accommodate them where possible.

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