The decision by Chancellor Jeremy Hunt to abolish the lifetime allowance on pension pots is an important one.
Within a few minutes of the Chancellor sitting down after his Budget speech, we received several enquiries from clients wanting to know the implications of the announcement.
The lifetime allowance limit was first introduced by Chancellor Gordon Brown in 2006 with a cap of £1.5million before increasing to £1.8million in 2012 under the Coalition Government and then subsequently reducing to the current £1.073million level, thereby significantly increasing the number of people impacted.
The abolition of the lifetime allowance in the Budget was accompanied by the announcement that the annual allowance would rise by £20,000 to £60,000.
It wasn’t all good news though. Hidden in the small print was the fact that people will now only be able to take 25% tax free cash from their pension subject to a maximum of £268,275. This means that irrespective of whether someone has a bigger pension pot than the previous lifetime allowance, this is the most they will be able to take out.
The announcement regarding the scrapping of the lifetime allowance was followed in short order by Labour saying that they would reinstate it and instead introduce a targeted scheme aimed directly at doctors.
In the light of this, our recommendation would be that any action should be taken sooner rather than later and certainly well ahead of the next General Election.
Many of the other announcements in the Budget were confirmation of what we already knew was coming. They included the capital gains tax exemption reducing from £12,300 to £6,000 in April 2023 and then to £3,000 in April 2024, while the dividend tax threshold will lower from £2,000 to £1,000 and then £500. Meanwhile, there was no change to the decision to increase corporation tax from 19% to 25%.
As the tax take continues to go up, our team will continue to advise our clients on the best ways to prepare for these changes in line with their longer-term financial planning requirements.
One announcement which did please many clients (and grandparents), was the extension of free childcare support for every child over the age of nine months.
Elsewhere in the Budget, the Chancellor shared his economic outlook with the heartening news that inflation is forecast to fall by the end of the year to 2.9% from the current level of 10.7%. While no one can yet be sure if this will play out exactly as he hopes, it feels about right now that we have experienced the inflationary shock.
Similarly, while the Office for Budget Responsibility (OBR) is only predicting that the economy will grow by 1.8% in 2024 and 2.5% in 2025, this was accompanied by the expectation that the UK will avoid slipping into recession.
Away from the Budget, the markets have experienced a choppy week on the back of the Silicon Valley Bank failure, providing a stark reminder that the financial crisis of 2008 was not actually that long ago. However, with far better controls and consumer protection in place, the risk of contagion this time around is remote.
As ever, if you have any questions regarding the Budget or any other matters, please get in touch with a member of the team.