Throughout the budget, chancellor Jeremy Hunt scrapped the Lifetime Allowance in a bid to get Britons working longer. The lifetime allowance is about by the Government and limits the full amount people can construct up in pension advantages over their lifetime while still having fun with the total tax advantages.
His decision has been criticized as “bizarre” by the UK’s leading economics research institute, which says it creates an unjustified extra inheritance tax loophole for top earners that needs to be closed as soon as possible.
The Institute for Fiscal Studies (IFS) stated that following last week’s budget, many individuals on high incomes will now have the opportunity to expand their pension pots so as to pass on a whole bunch of 1000’s of kilos more to their family members, tax-free, after they die.
The IFS says the aim of pension savings needs to be to fund retirement incomes not to flee tax.
Isaac Delestre, research economist on the IFS, said: “Whatever you think that of inheritance tax, a situation where the tax system treats pensions more favourably as an inheritance vehicle than as a method of providing income in retirement is bizarre. Abolishing the lifetime allowance has definite upsides but it should also open the door to larger pension pots being passed on tax-free at death.
“A wealthy individual dying with £2million of their pension – not implausible under the brand new rules – could reduce their inheritance tax bill by as much as £370,000 in comparison with a world where only £1.07million of their wealth is in a pension.”
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The lifetime allowance is currently £1,073,100. If someone went over their allowance, they might generally pay a tax charge on the surplus. Britons pay an excess after they take a lump sum or income from their pension pot, transfer overseas, or reach age 75 with unused pension advantages.
For instance, in case your pension pot totals £1,200,000 then the surplus is £126,900. This amount is then taxed at either 55 percent (should you take it as a lump sum) or 25 percent should you take it another way (e.g. through drawdown, UFPLS or buying an annuity). So their additional tax bill could be either £69,795 or £31,725.
The limit applied to all personal and workplace pensions but excluded the state pension, and was resulting from be frozen at its current level until 2026.
As a substitute of accelerating the allowance, as had been expected, the chancellor scrapped it altogether. Mr Hunt also increased the pensions annual tax-free allowance by 50 percent from £40,000 to £60,000.
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The chancellor said the move would encourage NHS doctors, consultants and other high-earners to stay within the workforce for longer.
He said: “I actually have listened to the concerns of many senior NHS clinicians who say unpredictable pension tax charges are making them leave the NHS just after they are needed most.
“The NHS is our biggest employer, and we are going to shortly publish the long-term workforce plan I promised within the Autumn Statement. But ahead of that I don’t want any doctor to retire early due to the best way pension taxes work.”
He added: “As chancellor, I actually have realised the difficulty goes wider than doctors. Nobody needs to be pushed out of the workforce for tax reasons. So today I’ll increase the pensions’ annual tax-free allowance by 50 percent from £40,000 to £60,000.
“Some have also asked me to extend the lifetime allowance from its £1 million limit. But I actually have decided not to do this. As a substitute I’ll go further and abolish the lifetime allowance altogether.”
Mr Hunt said the changes would “stop over 80 percent of NHS doctors from receiving a tax charge” and incentivise “our most experienced and productive staff to remain in work for longer”.
The changes will affect those that pay greater than £40,000 into their pension annually or have saved greater than £1.07million of their lifetime. Only 8,000 people across the UK have saved greater than £1million of their lifetime. Only one percent of staff, meanwhile, save greater than £40,000 per yr, in accordance with Government figures.