Budget: Pensions - lifetime allowance
Cut in tax-free pension pot leaves more middle earners ‘at risk’
Government plans for a further cut in the amount that can be saved tax-free into a pension will leave middle earners at risk of a nasty tax shock, experts have warned.
The Chancellor announced in the Budget that the lifetime allowance (LTA) will be reduced next year from £1.25 million to £1m, although it will resume rising with inflation from 2018.
The LTA was introduced in 2006 at £1.5m, rising to £1.8m before being lowered to £1.5m in 2012/13 and then to £1.25m in 2013/14.
As the allowance – which applies to all pensions except the state pension – is further reduced it drags more middle earners into the net, particularly members of public sector final salary schemes.
The most recent reduction affected 360,000 people, according to HM Revenue & Customs. Those retiring with a total pension fund above the LTA face a tax bill of 55% on the amount in excess, although there are protection arrangements available. Updated protection arrangements have not yet been published.
Alison Fleming, head of pensions at PwC in Scotland, said: “A further reduction in the lifetime pensions allowance will affect a significant number of employers and employees with defined benefit and defined contribution schemes, creating further overall uncertainty.
“For many employees working in senior roles both in the public and private sector, this reduction may mean a rethinking of their pension planning. In practice, we could see a long-serving senior civil servant or teacher potentially hitting the revised LTA around five years earlier than today. We are now effectively looking at a maximum pension of £50,000 per annum from employer-sponsored DB schemes.
“For DC savers, in the current low interest environment, a £1m pension pot will purchase an inflation-linked income of around £28,000 per year. The level of inequality between DB and DC savers is startling, and it will make it more difficult for DC savers to plan for the future.
“Although the impact is restricted to those in more senior roles, many thousands more people will worry that this is a tax on saving, as retirement choices become ever more complicated.”
Malcolm McLean, senior consultant at Barnett Waddingham, described the LTA cut as “unfair, unnecessary and unwise”.
Mr McLean added: “Although a million pounds still appears to be and is a very large sum of money, which clearly is beyond the aspirations of the average pension saver, it does mean that for a defined contribution pension pot it actually only produces an annual pension of little more than £27,000 (inflation proofed and providing for a spouse).”
Anyone in their 40s with pension savings worth around £423,000 might as well stop saving into a pension now, claimed Andrew Tully, pensions technical director at MGM Advantage.
“The £1m lifetime limit on pension saving is frankly penal and hits ordinary people who have started the savings habit early, saved hard, and enjoyed good investment growth,” said Mr Tully.
“The tax charge for any excess is 55%, which is pretty hefty when you might inadvertently trip over the new limit by achieving good investment performance.”