Government ambitions to liberate pension savers from tax constraints could have hit a snag as the majority of the population does not expect its latest policy to stand the test of time.
Chancellor Jeremy Hunt said the pensions lifetime allowance (LTA) would be scrapped from next April in last month’s Budget, allowing investors to save as much as they can into their pensions, subject to annual limits. The cap is £1.07mn.
However, a survey from pension provider AJ Bell showed that most savers were holding back from changing their plans, as they expect the policy to be reversed. Similarly, advisers also believe the policy will never fully come to fruition or will be immediately rowed back by a Labour government.
Last week, Labour deputy leader Angela Rayner doubled down on her party’s policy to immediately bring back the lifetime allowance, and find a “bespoke” solution for doctors, should it win the next general election, due by January 2025.
With the polls leaning towards a Labour victory, a survey of more than 2,000 AJ Bell customers found that three in four savers thought the lifetime allowance would be brought back in the future. Only 4 per cent of savers expected the LTA to be abolished for the long term. Among advisers, only 24 per cent were confident or somewhat confident the policy would last.
However, one of the Budget’s more restrictive policies, capping the maximum amount of cash taken as a tax-free lump sum at £268,275, is expected to stay the course. Some 45 per cent of respondents said they thought this amount would be reduced in future, while only 6 per cent said they thought it would increase.
When it came to planning how to withdraw pensions, advisers were hesitant to make concrete decisions based on potentially fluctuating policies. Only one in five said investors who stood to benefit from the higher allowance would ‘crystalise’ their pension to avoid the risk of the allowance being brought back in. One in four advisers said they would wait to see what happens before advising their clients.
Tom Selby, head of retirement policy of AJ Bell, said it was hoped Hunt’s policies would simplify a very complex pension system. However, he added: “After more than a decade of near-constant tinkering, savers are understandably sceptical that the chancellor’s big announcement will stand the test of time.”
Selby said the uncertainty was now the biggest challenge savers faced when managing their pensions. “Ideally, people would make these decisions in a clear-minded way, based on their personal circumstances and with their long-term goals firmly in mind,” he said.
“But the threat of the goalposts being shifted means all too often this isn’t the case. Some people will inevitably be considering crystallising their retirement pot earlier than planned in an attempt to avoid the potential for a lifetime allowance charge in the future. This is clearly far from ideal,” he added.
The chancellor also increased the annual allowance from £40,000 to £60,000 and upped the ‘money purchase annual allowance’ from £4,000 to £10,000 in last month’s Budget.
