Ending the lifetime allowance: implications for workplace pensions

The Government’s shock abolition of the lifetime allowance (LTA) in the March 2023 budget has received a mixed reception. Many expected the current LTA of just over a million to be increased but the radical plan to abolish it altogether sent a clear signal that the government was serious about ensuring doctors remain in and return to NHS employment.  

The Government said its aim was also to encourage some over 50s who have taken early retirement back into the workforce but only employment figures will tell whether this desired outcome has been achieved. Not surprisingly, the Government has retained a limit on the amount that can be taken by way of tax free cash and this will remain restricted to 25% of the current LTA of £1,073,100.

For pension advisers, the abolition of the LTA provides welcome simplification to complicated tax rules. For employers, however, not all of the outcomes that could arise from the abolition of the LTA are clear and these will need further consideration in the coming months.

For example, in the context of auto-enrolment many employers have auto-enrolled senior employees into their auto-enrolment schemes only for the employee to opt-out and request a salary uplift in lieu of pension contributions. In our experience, the main reason for the request has been the impact of the LTA on the employee’s total pension benefits. Contracts have been carefully negotiated to avoid falling foul of the Pensions Regulator’s prohibition on inducing employees to opt-out of a qualifying pension scheme.

In our experience, contracts generally provide that employees will be re-enrolled into the auto-enrolment scheme every three years (with a requirement for the employee to opt-out again to continue receiving the salary uplift). Employers may now wish to check and revisit the terms of such contractual arrangements to bring the salary uplift agreement to an end given that the employee will no longer have a LTA issue.

Lighting the touch paper to the LTA does not necessarily mean it is gone forever and the Labour party has already stated that it would seek to re-introduce it if elected, subject to retaining flexibility for doctors. Put quite simply this strategy would open a “can of worms.” The current LTA has remained so low for so long that there are now a number of public sector workers outside of the NHS who are over or nearly caught by the current LTA because of the benefits they have accrued in their public sector scheme. Re-introducing the LTA will add fuel to the fire of the challenge that the next government will face in terms of balancing the interests of employees of the public sector when it comes to pay and pensions.