Whether it is a leak or simply a well sourced rumour, there is speculation across financial services media that the Chancellor of the Exchequer, Jeremy Hunt, will tomorrow unveil huge increases to the Pensions Lifetime allowance (LTA) and Pensions Annual Allowance (AA).
What is the Pension Lifetime Allowance?
Introduced in 2006, this is the maximum value or equivalent value your can accumulate in pension value during your lifetime.
Lifetime Allowance is calculated as follows:
The Lifetime Allowance is currently at £1,073,100. If you exceed this allowance, you face tax penalties. Speculation is that this will be increased in the Budget tomorrow to £1,800,000, which is only back to where it was in 2010 through to 2012.
What is the Pension Annual Allowance?
This is the maximum value or equivalent value that can be contributed by both you and your employer to your pension schemes each tax year – this is a combined amount into all pensions.
Annual Allowance is calculated as follows:
The Annual allowance is currently the lower of your salary or £40,000 pa. If you exceed this allowance, you face tax penalties. If you earn £20,000 pa, the maximum that can be paid into your pension is the lower of your salary or £40,000 pa i.e., £20,000 pa. If you earn £60,000 pa, the maximum that can be paid into your pension is the lower of your salary or £40,000 pa i.e., £40,000. Speculation is that this will be increased in the Budget tomorrow to £60,000 pa. This was at £255,000 pa in 2011 and was reduced to £50,000 pa in 2012 and reduced again to £40,000 pa in 2014.
Despite headlines suggesting this is a move to encourage people back to work, we suggest it is not a ‘headline’ that will encourage ‘50 somethings’ back to work, it is more so an encouragement for senior health care professionals, civil servants, emergency services and local government workers that are near the lifetime allowance threshold and/or the annual allowance limit to not take early retirement as they would get penalised if they stay on at work and build up even greater pension benefits only to then be heavily taxed on them. Increasing the allowance thresholds would clearly remove some pressure on those that may be thinking of leaving early due to excess over allowance penalties.
That said, it would be most welcome and will present easier retirement planning options for all.