Recent reports suggest that Jeremy Hunt is looking to make drastic reforms to pension rules to relieve the financial pressure on households. Mr Hunt is considering raising the lifetime and annual allowance for pensions in his Budget next week, The Daily Mail reported.
What is the annual allowance?
As it stands, the annual pension allowance for the majority of people comes to 40,000 every year.
This is the cap on how much people can place into their pension pot annually without having to pay tax.
It should be noted that this is not the maximum pension contribution those preparing for retirement can make.
However, if someone exceeds the allowance they will not get any tax relief on contributions above the threshold.
What is the lifetime allowance?
Currently, the pension lifetime allowance sits at £1,073,100 and will remain unchanged until the 2025/26 tax year under existing Government policy.
This restricts how much a person can build up in pension benefits over their life while still accessing the full tax benefits.
When someone goes over this threshold, they will usually be awarded with a tax charge on the excess at certain times.
The lifetime allowance appliance applies to all pensioners an individual has, including their state pension.
As part of its Spring 2021, the Government announced pension allowances would be frozen for five years.
While most people never get close to reaching the lifetime allowance, this change meant that people were more likely to do so.
As a result, older Britons became more likely of being hit with extra tax charges which could affect their living standards.
Jason Hollands, the managing director at Evelyn Partners, praised the potential decision as it would stop Britons from being hit with “punitive” tax charges.
He explained: “This will be welcome news after the tax raids announced in his Autumn Statement.
“The annual and lifetime pension allowances, which stand at £40,000 and £1.073million respectively, are caps on how much someone can contribute into their pension while still benefiting from tax relief each year and then build-up in their pension before facing punitive tax charges on the excess when they take pension benefits.
“In the case of the lifetime allowance, investment growth is included so someone who has made wise investment decisions can be penalised with a tax charge which many will regard as unfair.”
The retirement expert highlighted how the pension allowance freeze has hurt people in being able to save enough money to live comfortably later in life.
Mr Hollands added: “This has created a disincentive for continued pension saving amongst higher earning professionals and is a factor driving early-retirement decisions at a time when the economy faces the challenge of tightening labour market.
“In particular, restrictions on pension allowances – which have been reduced over the years both in nominal and real terms – have created well-documented problems in the public sector, especially in the NHS, where generous defined benefit pensions remain in place, meaning that many professionals retire early or are reluctant to take on further work.
“But without a rethink, the lifetime allowance is becoming a greater issue for those with defined contribution pension schemes who have saved diligently over a long period, and this will only escalate at current rates of inflation.”
Mr Hunt is set to announce the Government’s fiscal agenda, including regarding on pensions, on Wednesday, March 15, 2023.