Beware the ideas of March – or perhaps embrace them

It seems likely the lifetime allowance will no longer be pegged to £1.0731 million until 2026, but may be increased by as much as £500,000. 

Calls for the annual allowance to be increased seem not to have fallen on deaf ears and may see a 50 per cent rise to £60,000 from £40,000. 

How the taper will be managed for those with adjusted income above £240,000 has not been mentioned.

The money purchase annual allowance — for many the poster child of the campaign to return retirees over the age of 50 to the workplace — may be increased by a factor of 2.5 to £10,000 from £4,000.

Good news for the wealthy and their financial advisers

These changes could be a “game-changer” for the pension options of wealthier workers, according to Steve Webb, LCP partner and former pensions minister. But he warned of unforeseen consequences. 

Higher allowances will allow some to pay more into their pension, achieving their retirement fund targets sooner. They will be able to afford to retire earlier, the exact opposite of the government’s intentions.

“If these rumours are true, these jaw-dropping changes could be a game-changer for those who are currently limited when it comes to saving into a pension.  

“Up to 2mn people who have already breached lifetime allowance limits — or could expect to do so — will now find it worth exploring saving more into a pension.”

An increase to the LA will reduce the complexity of the scheme, said Webb, allowing those currently locked in at funds of £1.25mn or £1.5mn free to save more. 

Those approaching retirement will also pay far less tax when accessing their pensions. 

The changes may give the financial advisory market a considerable boost. 

“Financial advice firms will be cancelling all holidays for their advisers as they will face a surge in demand following the Budget,” said Webb. 

Financial advice firms will be cancelling all holidays for their advisers as they will face a surge in demand following the Budget

Steve Webb, LCP

“We are likely to see a surge in interest in saving more for a pension, and pension providers may also need to gear up to deal with the increased demand.”

Little benefit for the sick and lower paid

Webb is not alone in thinking the whispers from Whitehall may simply provide a windfall for those already fairly well off. 

“It’s hard to see how these moves will get people back to work — once you’ve taken early retirement and worked out this is affordable, it’s unlikely that being able to put more in your pension would encourage you back,” said Becky O’Connor, director of public affairs at PensionBee.

“In fact, it’s possible that high earners who can maximise these allowances could end up leaving work sooner as a result of the higher limits, as they will be able to build up more, more quickly.” 

The changes may encourage older workers in relatively highly paid work to stay in the labour market to build up a more comfortable retirement. But no amount of financial incentive is going to induce someone who retired on ill-health grounds to go back to work. 

“If you can’t work, you can’t work,” said O’Connor. “Equally, for people on low or moderate incomes who are only paying the minimum into their pensions, the annual and lifetime allowances are less relevant anyway, as they are probably not likely to hit either of them, even at the current levels.”

Increasing the availability of part time and flexible work is more likely to encourage workers out of retirement, said O’Connor, offering the opportunity for those who need to work, while satisfying those who simply wish to remain active. 

These measures look more like the chancellor is preparing people for a rise in state pension age to 68 from 67, which could hit people now in their late 40s and early 50s.

This group will need as much help as they can get to build up their private pension pots by enough to keep their dream of retiring before the state pension age alive,” added O’Connor.

Overall a winning design

Steven Cameron, pensions director at Aegon, said reforms to the various pension allowances would be highly beneficial. 

“Any increases to these will be good news and in line with the chancellor’s aim to get this group off the golf course and back to work,” said Cameron. 

Any increases to these will be good news and in line with the chancellor’s aim to get this group off the golf course and back to work

Steven Cameron, Aegon

“We’re hoping for bold increases as each of the allowances was far higher at some point in the past, and if they had been inflation protected rather than cut back by previous chancellors, much more could have been built up in pensions to provide more comfortable retirements.”

The LTA is currently slightly more than £1mn, but was as high as £1.8mn in April 2011. Had it increased with inflation it would be at £2.5mn said Cameron. 

The AA was £255,000, but was reduced to £50,000 on April 6 2011 and then to £40,000 in April 2014. Had it increased in line with inflation, it would now be more than £367,000.

The MPAA would have been around £12,700 had it increased with inflation from the original £10,000. This is slightly higher than the current standard personal income tax allowance of £12,570. 

A survey by PensionBee showed the majority (64 per cent) of pension savers felt the annual allowance should rise in line with inflation. More than one third (37 per cent) said they would like to see the LTA unfrozen.

Research by PensionBee has identified what it calls a “pre-state pension gap” of more than £130,000 in total retirement income for someone seeking to retire at 60 rather than the proposed state pension age of 68 while maintaining a moderate living standard. 

A typical worker would have had to save an additional £150,000 by the age of 60 to achieve this.