Lifetime pensions allowance cut to £1 million

The Chancellor George Osborne’s budget statement last week was full of surprises. For a comprehensive list of what was announced, please refer to our earlier summary of events, here. One of the proposed measures Mr. Osborne outlined caused ruffled feathers with the investment and pensions community. He has plans to cut the lifetimes pensions allowance from £1.25m to £1m. This figure would be 66% lower than the 2011/12 level of £1.8m.

In simple terms…

The lifetime pensions allowance is the cap at which tax starts to be taken from a pension pot. Currently, that cap is £1.25m. This means that any money going into the pot over that ceiling will be taxed at:

  • 25% if you get your pension as an annuity
  • 55% if you get it as a lump sum

A reduction in the limit may result in greater taxation of middle earners, and punish hardworking people.

From Ed to George…

It was less than a month ago that the world learned of Labour leader Ed Milliband’s plan to slash the lifetime pensions allowance to £1m. The move, he said, would facilitate the cut of student tuition fees from £9,000 to £6,000 per year, as well as increase maintenance grants.

This was a positive for many young voters. However, the suggestion of lowering the allowance ceiling seemed unfair to many older people who had saved their money to retire with a decent living pension.

During last week’s Budget, it was confirmed by the Chancellor that the Tories are also in favour of reducing the lifetime allowance to £1m. This makes the policy bi-partisan. Whoever gets into 10 Downing Street, then, will see that the allowance is lowered to £1m starting from April 2016.

Pulling the rug out from under savers’ feet with workplace pensions

While a £0.25m reduction might not sound massively significant (particularly when compared with the £0.5m drop from 2011/12 to 2014/15), it does signal to hardworking people that their pensions savings are not safe.

Each time the Chancellor moves the allowance goalposts, they are gambling with people’s hard-earned pensions, and this could have a massive effect on their quality of life, as well as how much of a burden they will be on the State.

Critics of the lifetime allowance have begun to argue whether there is now a need for more radical reform of the system, with many proposing that it is abandoned entirely.

Although the allowance cap was initially put in place to enforce some control over lifetime savings, the huge reduction in the annual contribution limit from £215,000 to the current limit of £40,000 has made that redundant. Now, the tax threshold simply punishes those earners who save hard for their retirement.

Squeezing the investment savvy

Many people suggest that the lifetime pensions allowance is a way of recouping tax from mid-to-high earners. Scott Atkinson, Director and Managing Director of GPFM Financial Planners, has suggested that ‘in reality, the changes will affect only a small percentage of savers.’

He continues, ‘It is worth noting that the original lifetime allowance was introduced in 2006 and started at £1.5m, increased to £1.8m then reduced to £1.5m then reduced to £1.25m and will now reduce again to £1m from April 2016. This seems to indicate that it is a soft target for tax saving and may well be reviewed again in the future.’

The £1m lifetime allowance isn’t a fixed figure entirely, however. Scott explains: ‘The proposal is to index the lifetime allowance from 2018, but even if we use 2% per annum as the indexation assumption, it will take over 10 years to get back up to the £1.25M it is today.’

While the tax treatment of paying into workplace pensions is favourable, Scott suggests ‘it may be sensible to consider some pension and some ISA saving at the same time’. To consider your options fully, get in touch with one of our expert financial planners today.