Plans to scrap the pensions lifetime allowance (LTA) will benefit all pension savers, an expert has said.
The LTA allows a person to save up to £1,073,100 into their private pensions and not pay tax, with the policy to be scrapped from April 2024.
Once the policy has been scrapped, income and lump sums from pensions valued above the LTA will be subject to income tax at the beneficiary’s marginal rate
Tom Selby, director of public policy at AJ Bell, said: “Savers in all types of pension scheme stand to benefit, with those accessing a defined contribution retirement pot only having to pay income tax on withdrawals.
“The end of the lifetime allowance does not, unfortunately, mean the end of complexity, because two new lifetime limits will be introduced in its place.
“These new allowances are designed to limit the pension tax-free lump sums people can receive in life and the tax-free lump sums they can pass onto beneficiaries when they die.”
Under the new rules, most pension savers will be able to receive £268,275 in tax-free pension cash over their lifetime, which is a quarter of the current LTA.
There will be a lump sum and death benefit allowance, including tax-free cash entitlements while a person is alive and any tax-free lump sums paid from pensions left over when they die, which will be set at the current LTA limit of £1,073,100.
However, Labour has said it would reverse the scrapping of the LTA if it wins the next General Election.
Mr Selby warned this would be very difficult to implement. He said: “Labour shadow chancellor Rachel Reeves has previously said her party will reintroduce the lifetime allowance, with a carve-out potentially created for the NHS scheme.
“This would be a hugely complicated and unnecessary intervention, when policymakers should really be focusing on making the rules simpler and encouraging people to save more for retirement.”
However, others have warned scrapping the LTA itself could cause issues. David Brooks, head of Policy at Broadstone, said: “The Government are storming ahead with the abolition of the LTA by next Spring in what appears to be a decision driven by ideology rather than practicality.
“The complexity and sheer volume of detail that the DWP will have to wade through means the margin for error is high given the ambitious timeframe. The transition period is working well which makes the rush even more perplexing.”
A DWP report published recently found 88 per cent of eligible employees, or 20.4 million people, were participating in a workplace pension in 2022.
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