The devil will be in the detail as always, but the three significant changes, with comments are below:

  1. Lifetime allowance is down to £1.25m. For context, assuming a 25% tax-free pension commencement lump sum is provided this would give an annual income of around £26,000 per annum based on current annuity rates, and a male aged 65 providing inflation linked benefits where two-thirds will continue to a spouse 1
  2. Annual allowance is down to £40,000. There was no mention of any changes to Carry Forward, so is a relatively minor change in the context of the lifetime allowance. In some situations individuals will be able to shelter up to £200,000 from tax in one single year
  3. Capped Drawdown rates up to 120% of the Government Actuary’s Department maximum. This will be viewed as a positive, but in many cases such a high level of withdrawal would not be advisable without having a long-term negative impact on pensioners.

It should be noted that the above is only based on the Chancellor’s statement, and is not law, more detail will follow on HM Treasury’s website later today, with a budget to follow in 2013 and the final Finance Act coming into law months from now. Individuals should seek personal advice.

1For background an MPs pension, if it were £62,500 on a defined benefit (“scheme pension”) benefit would avoid the 55% lifetime allowance tax charge that is paid if an individual broaches the lifetime allowance. A private saver would only be able to provide £26,000 per annum if they wish to buy the annuity as detailed above.

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