George Osborne is slashing the lifetime allowance on pensions savings from £1.25m to £1m from April 2016. The move will create major problems for many middle income families who have saved diligently for retirement. The new level is just 66 per cent of the lifetime allowance of £1.8m for 2011/12.
A reduction in the lifetime allowance will affect defined-contribution (DC) savers disproportionately compared to those in defined-benefits (DB) schemes, for instance civil servants and politicians. The incredibly generous conversion factor of 20:1 when calculating the value of a defined benefit pension scheme means those reaching a £1m lifetime allowance could have a £50,000 DB pension. The 55 per cent tax charge on funds exceeding the lifetime allowance will potentially hit consultant doctors, senior GPs, senior civil servants, top head teachers and senior members of the armed forces.
By contrast, someone in a £1m DC scheme buying an equivalent inflation-linked pension that pays 50 per cent to your spouse after death can only buy an income of £26,000 a year. That's hardly riches.
Suffolk Life estimates that if a 21 year old works a 35-hour week on the increased minimum wage of £6.70 an hour and manages to put 20 per cent of their earnings in to a pension then by the time they reach the age of 67 they could easily have reached the lifetime limit.
The unwelcome news is partially offset by indexing the Lifetime Allowance from 2018. That means the allowance should, in theory, stop shrinking over time.
Steve Patterson, managing director of Intelligent Pensions says: "The Lifetime allowance charge is an insidious tax. People save in good faith and are being encouraged to do so, and yet if they make good investment choices and achieve better-than-expected growth they could ultimately pay a heavy price but they won’t see it coming."
Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants says: "This is not the right way to deal with long term investment. Every year the Government steps in and moves the goalposts. The Chancellor should exercise caution when meddling with the pension pots of those who have been contributing to them for 30 to 40 years in many cases. They are heavily relied upon by those looking to retire and care should be taken not to jeopardise their future."
Mark Abbs, a partner at chartered accountants Blick Rothenberg says: "The complete U-turn on pension policy is now without doubt. There is a clear intention by all political parties to reduce tax relief for pension contributions. Encouraging us to save less for retirement is a timebomb for the future as we live longer."