Pensions overhaul: What the changes mean for you
By Lewis Denison, ITV News Westminster Producer
Reforms to the UK pension system have been announced by the chancellor in the Spring Budget, as part of the government's plans to incentivise people back to work.
The UK economy has flatlined in recent months and one of the biggest barriers to growth is said to be "economic inactivity" - that is working age people not in employment who have not been seeking work within the last four weeks.
Thousands of people decided to stop working following the coronavirus pandemic, slowing an already stalled economy.
Jeremy Hunt wants to boost employment numbers by reversing the trend of people taking an early retirement with changes to pension allowances.
On Wednesday, he announced he will abolish the lifetime allowance limit on pensions and increase the pensions annual tax-free allowance from £40,000 to £60,000.
What are the pension lifetime allowance and annual pension allowance?
Mr Hunt hopes to bring people out of early retirement by increasing allowances for private pensions.
The pension lifetime allowance (LTA) is the amount of money a person can accumulate over their lifetime without paying additional tax.
Under the current allowance limit, which was due to last until 2026, people would begin paying additional tax after saving £1,073,100.
Mr Hunt has now abolished the Lifetime Allowance altogether.
The annual pension allowance is the amount of money someone can pay into their pension pot over a year without having to pay a penalty.
The current allowance is set at £40,000, which has now been stretched to £60,000.
Both allowances only apply to private, not state pensions.
What does this mean for you?
Under current rules you can save £1,073,100 into your pension pot without paying any tax on it.
Anyone who saves more than that has, until now, been required to pay tax when they withdraw the additional amount.
If you took it as a lump sum, you would have been required to pay 55% on those additional savings.
Is it enough to boost the economy?
Chancellor Hunt hopes by making the change he can encourage people out of early retirement with the carrot that they could boost their pension by hundreds of thousands.
But Institute for Fiscal Studies (IFS) director Paul Johnson said the Chancellor is missing a “serious long term strategy” on pension tax policy.
“Listened to concerns of senior NHS clinicians’ says Mr Hunt,” he tweeted.
“Changing pension tax relief as a result. Should have changed NHS (and other public sector) pension schemes. Sledgehammer to crack a nut.
“There is a case for raising annual and lifetime allowances – reversing last 13 years of policy. But won’t have much effect on employment. And damaging and complex tapering system remains.
“Pension tax policy needs a serious long term strategy. Such a strategy completely missing.”
And Gianpaolo Mantini, chartered financial planner and partner at wealth management firm Saltus, said it should not be forgotten that LTA has been frozen for a decade and if it had followed inflation it would be more than £1 million higher than it currently is.
He told ITV News the current allowance is "dampening economic growth and reducing the level of skilled workers in the UK - particularly in the NHS", having been reduced by 40% since 2011/12.
"We have had considerable inflationary pressures over this period and, had the LTA simply tracked inflation, it would now stand at just over £2.4 million - so ideally the Chancellor would increase it to match inflation, or better still, remove it altogether."
But, he said, the change will be an "extremely welcome move and will remove a barrier to pension saving for millions of people".
What are the issues with the current system?
As Mr Johnson and Mr Mantini said, some of the main groups thought to be taking early retirement over their pension lifetime allowance are senior doctors and consultants, who have been leaving the NHS.
The British Medical Association (BMA) has called the current LTA rate “punitive” and argued it has encouraged doctors to leave the profession.
On its website, the BMA said: “High contribution rates, significant pay erosion, and a punitive pension taxation system have resulted not only in an exceedingly high cost of scheme membership for senior doctors, but also in them receiving reduced pension benefits.
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“This has resulted in large numbers of doctors retiring early or reducing their hours.”
Mr Martini said the changes to LTAs "should help resolve one of the key problems within the NHS; the fact that senior doctors, consultants and nurses have been leaving in droves as the annual allowance and LTA burdened them with large tax bills."
In January, former pensions minister Baroness Altmann lobbied ministers to change “illogical” pension rules to help ease a workforce crisis in the NHS.
During a House of Lords debate, the Conservative peer said “even middle earners” were finding that their “supposedly tax-free pension contributions” were “causing them to receive huge tax demands that can even exceed the extra earnings”.
She said it meant that some doctors were “effectively paying to work for the NHS” and that the current system was “incentivising people not to work”.
What about people on lower earnings?
One of the main criticisms of Mr Hunt's reform is that it really only helps those with high earnings, who are hoping to have pension pots exceeding a million pounds - however there are only 1,700 of those in the UK, according to the latest figures.
Pete Hykin, a co-founder of Penfold Pensions, said the changes "will not benefit younger savers or those on low and middle incomes who are struggling to maintain even the minimum pension contributions amidst the cost of living crisis".
He told ITV News it is these segments of society which "desperately need attention from both the government and the pensions industry alike".
“We have a collective responsibility to innovate the pensions sector in order to help the majority of UK savers to prepare for life after work and avoid pension poverty," he added.
He said a "Pensions Dashboards" which was announced by the government in October, to make managing pensions easier by putting all the information in one place, is still yet to materialise.
"We expect to see the major industry players putting more pressure on the Department for Work and Pensions to shift the emphasis from discussion and planning to execution."
After the changes were announced, Institute for Fiscal Studies (IFS) director Paul Johnson said the chancellor is missing a “serious long term strategy” on pension tax policy.
He tweeted: “‘Listened to concerns of senior NHS clinicians’ says Mr Hunt.
“Changing pension tax relief as a result. Should have changed NHS (and other public sector) pension schemes. Sledgehammer to crack a nut.
“There is a case for raising annual and lifetime allowances – reversing last 13 years of policy. But won’t have much effect on employment. And damaging and complex tapering system remains.
“Pension tax policy needs a serious long term strategy. Such a strategy completely missing.”
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