Tom Moore
CEO
The big news in Jeremy Hunt’s spring Budget was the unexpected abolition of the Lifetime Allowance (LTA) charge.
Until the announcement the LTA stood at £1,073,100. LTA limits the maximum tax-privileged benefits that can be enjoyed from pensions. It is only relevant when benefits are drawn (or at age 75 if earlier) which is a ‘benefit crystallisation event’.
These events absorb all or part of the LTA and once exhausted, the payment of any excess benefits will give rise to a tax charge. The rate was 25% for income benefit payments and 55% for capital payments.
With the LTA charge being abolished, pension savers need no longer worry about the overall value of their pension in this context. (The limit of £1,073,100, unless there is protection under a previous regime, will still be used in the calculation of the ‘Pension Commencement Lump Sum’, generally the maximum amount of tax-free cash that can be taken).
Political Landscape
Immediately, the Labour Party retorted that it intends to reverse the abolition: could this have retrospective effect, and be read as though nothing had ever happened? Given current opinion polls there might be just a narrow ‘window of opportunity’ for pension members to benefit.
There are perilous dangers to any Government of reliance on retrospective legislation, even if a new administration will want to maximise the tax take from the reversal. In our opinion a back-dated change is unlikely, but make no mistake, Governments can effect any legal changes they want, subject to the normal processes.
The real danger lies in the credibility of, and faith in, our legal system upon which the nation’s administrative and economic framework depends. Retrospective changes make it impossible to know with certainly what the ‘current’ law is. How can any citizen plan their life in this situation?
Rees Rules
It has long been accepted that the Government may use retrospective tax changes to counter the financial risks from tax avoidance. The ‘acceptable’ approach was codified in 1978 in the so-called ‘Rees Rules’.
Steps taken in 2004 by the then Labour Government to counteract a number of schemes aimed at avoiding tax on employment income can be read as indicating a strong desire to remain within the boundaries of the Rees Rules. Further changes introduced in 2008, to avoidance schemes exploiting double taxation treaties were, however, justified by the Government on the basis that it did no more than clarify the law. There was cross-party political agreement, and within professional circles, that the schemes were unacceptable, and the arrangements should be blocked.
The abolition of the LTA is entirely different. There is no political (or even economic) consensus on whether the limit should be retained, altered, or abolished. So long as the law change receives Royal Assent, the LTA will be abolished from 6 April 2023, whatever the stated plans of the Opposition.
To re-impose the LTA with retrospective effect would obliterate the Rees Rules. Anyone finding equivalence between such a change and the anti-avoidance measures referred to above is simply mistaken.
Our strong view is that any reversal of the abolition of the LTA – if it happens – must include some form of ‘grandfathering’ provision to protect those who have legally benefited from the brief absence of a cap.
Ultimately of course, Governments can do what they want, and our view may be wrong. But if anything like this happens, it will mark the start of a frightening new era.