Removal of lifetime allowance is 'dramatically' boosting pension saving

The scrapping of the pension Lifetime Allowance (LTA) in this year’s Budget is having a dramatic impact on pension saving and retirement planning amongst higher rate taxpayers, new research from Investec Wealth & Investment shows.

Removing the £1.073 million limit on pension saving ended a disincentive for retirement saving which had led to higher earners retiring early and major tax penalties of 55% for lump sum withdrawals and 25% plus income tax for income tax withdrawals for those who breached the allowance. Most recent HMRC data shows 8,610 LTA charges worth £382 million were reported by pension schemes.

Investec’s study with higher rate taxpayers has found that ditching the LTA has driven major changes with nearly six out of 10 (59%) taking a range of actions as a result.

More than half (51%) say they have restarted, increased or plan to increase pension contributions. That includes 16% who had stopped pension saving because they had reached or were close to the LTA. Those who have already increased pension payments say they are putting in an additional £650 a month.

Nearly a quarter (23%) say they have delayed their planned retirement or will probably delay retirement plans because they can save more into their pension. Around 10% say they have come out of retirement as a result while another 6% say they are planning on coming out of retirement.

Ade Babatunde, financial planning director at Investec Wealth & Investment, said: “Scrapping the Lifetime Allowance was a surprise in this year’s Budget and it seems to have been very much welcomed by those who have built significant wealth across their pensions and by higher, and additional, rate tax payers.

“It’s worth remembering that the LTA was £1.5 million when it was first introduced in 2006 and went as high as £1.8 million at one stage so the gradual reduction meant it potentially affected more and more taxpayers and had a major impact on the amount they were willing to contribute to their pensions.

“Abolishing the LTA simplifies some decisions around retirement and estate planning but also makes it more important that people seek independent advice on pensions due to the changes in tax treatment.”