If you read the Sunday papers you may have seen reports that HM Treasury is considering reducing the pensions lifetime allowance by up to a quarter from £1,073,100 to around £800,000. If this happens, many more investors could breach the pensions lifetime allowance and incur the relevant tax penalties. And this isn't something that would just happen to the mega-rich: many professionals such as NHS and public sector employees in defined-benefit (DB) schemes and employees who have diligently contributed to other types of workplace pensions for decades could fall foul of such a lower limit.
“For example, a DB pension member with a final pensionable salary of £69,566 and 40 years of service would easily accrue a pension of around £34,000 and a lump sum of £104,000, which would breach a lifetime allowance of £800,000,” says Ian Browne, pensions expert at wealth manager Quilter. “And for defined-contribution pensions savers, assuming that the lifetime allowance is frozen indefinitely at this lower level, it is a realistic prospect that someone aged 50 with a pension value of £384,814 [could] hit a limit of £800,000 in 15 years’ time at age 65, if we assume 5 per cent a year investment returns.”
But don’t dig out the forms for opting out of your workplace pension or cancel your monthly direct debits into your self-invested personal pension (Sipp) yet. This is just a report that something is being considered and may not happen. There have been many rumours about raids on pensions over the years which have not been borne out.