High earners are rejoining company retirement plans after pension changes in the March Budget abolished tax charges for exceeding the lifetime allowance on contributions.
Financial advisers said they had received a flurry of calls since the announcement from wealthy clients who had previously stopped saving into their company schemes or had switched to riskier products, in fear of a big tax bill for breaching pension savings limits.
Among this group were those who had amassed pension pots near the previous lifetime allowance, or LTA, of £1,073,100 or who had taken action in the past to protect a higher LTA — which prevents any further contributions to their company retirement fund.
Some may have received a salary supplement in lieu of a pension contribution from their employer. However, these payments do not enjoy the full tax benefits of pension saving.
The LTA was scrapped from April 6 this year, lifting the threat of tax charges for breaches and providing an incentive for higher earners to rejoin company schemes.
“Employers are getting asked by staff if they can get back into the pension,” said Andy Parker, partner with Barnett Waddingham, the pension consultants.
“In the defined contribution [pension] space, some employer clients are reviewing their policy on the payment of salary supplements, where pension contributions have previously been restricted due to either LTA or [other allowance] issues.”
Jason Hollands, managing director at wealth manager Evelyn Partners, said: “Lots of clients who have not funded their pensions in recent years are certainly planning to rejoin their company defined-contribution schemes and most employers will be happy to accommodate this.”
However, he said his clients were not typically “rushing” to do this for the April payroll. Instead, they planned to ask their employer to pay any bonus into their pension at the end of the tax year, which would also allow time for the changes to complete the legislative process.
Advisers also offered a note of caution for those looking to get back into workplace pension saving, since the Labour party had pledged to reverse the abolition of the LTA if it were to win the next general election, expected in 2024. In the wake of the Budget, Labour called the changes “the wrong priority, at the wrong time, for the wrong people”.
Parker said: “In all cases, employees are being allowed back into the scheme if they previously had an LTA issue but with a strong warning note to consider the changes carefully, particularly given the comments made by Labour about repealing the recent Budget changes.”
Christian Mather, financial adviser at Aegis Financial Planning, said there was also much interest among his clients on how to take advantage of the more generous pension savings arrangements, given the previous lifetime allowance had not been “fit for purpose”.
“It was effectively a tax on the wealthy but it also pushed higher earners into riskier products, such as VCTs [venture capital trusts],” said Mather.
Mather said he had advised several business owners who were planning to take cash out of their business to maximise contributions through carry forward, the rule that enables savers to use any unused annual allowance from the previous three tax years.
Higher earners have renewed their interest in pension saving following wider Budget changes aimed at dissuading older workers, particularly NHS doctors and consultants, from retiring.
The annual allowance, which sets how much can be saved into or grow inside a pension tax-free each year, was raised from £40,000 to £60,000 from April 6. The so-called money purchase annual allowance also rose from £4,000 to £10,000. This limits the contributions of those who previously triggered a tax charge by accessing their pension pot and later resumed saving into it.
Richard Harwood, financial planner at wealth manager RBC Brewin Dolphin, said a number of clients who had been dormant on pension saving for years “were now revisiting their workplace pension or private schemes because of the tax efficiency of pension saving. Many can now effectively contribute up to £60,000 per annum.”
Advisers also said those returning to pensions should bear in mind new restrictions on tax-free cash. When the government scrapped the LTA charges, it also limited the maximum an individual can claim as tax-free cash from their pension pots to 25 per cent of the old LTA, or £268,275, except where previous protections on funds applied.
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