How to boil a frog- tax changes for pensions

We’ve been puzzled at how the Treasury think they can extract £3.5bn pa of tax savings from the 100,000 people likely to be impacted by the new Annual Allowance and why they consider the changes to the LTA will only bring in £0.5bn pa. That’s until we read GAD’s paper on reducing the Annual Allowance.

In section 1.6 of his Overview, the Government Actuary states

Using the same assumptions as  were used to derive the 16.1 factor recommended in the Report, the equivalent factor on retirement at age 60 (for the LTA) would be 23.6:1 and at 65 would be 22.1. That is, I am effectively assuming that pensions are more valuable than implied by the existing 20:1 Lifetime Allowance Factor, since I am assuming higher life expectancy and lower discount rates. In my opinion, this seems appropriate compared to the position 5 to 10 years ago when the previous factors were adopted.

Surprisingly, the Treasury have chosen to adopt the 16:1 AA factor but not the recommended LTA factors. It’s  statement on the matter comes at the end of a very obscure discussion on age-related valuation factors which it dismisses as too complex an idea. This section  makes no mention of GAD’s recommendation but baldly concludes.

The Government is minded to make no change and for the LTA valuation factor to remain at 20, but it will continue to monitor
this issue. (my italics)

Did the Treasury consider the implications of GAD’s recommendations too much for us to stomach right now? Is the door ajar to adopt them when the dust settles?

These questions should be of particular interest to those likely to retire from 2012.  Were the Treasury to adopt the GAD recommendation to use an LTA factor of 22.1 then the notional LTA Cap would fall to £1.36m (20 times a pension of £68,000 pa) , if they adopted the 23.6 factor the CAP would fall to £1.27m (20 times a pension of £63,500pa).

Adopting GAD’s recommendation could impact a lot of people. The Baby Boomers hit retirement in the next five years. As Frank Field puts it in a recent article (on Schemexpert)

.. more than 800,000 people will celebrate their 65th birthday in 2012, up 150,000 on the 2011 figure.

In case you have forgotten, this is 800,000 of a total of a little over 12 million. This massive increase, which stems from the post-war spike in births as the troops came home after the war, will lead to significant rises in government spending on the state pension.

They are of course the generation that have most to look forward to from occupational pension benefits (and most to lose from changes in the LTA).

For those interested in the cost of providing an equivalent DC benefit, GAD reckon the factor for buying an RPI annuity at  32:1 factor and a CPI variant at 28;1. Put another way,GAD are saying that the maximum RPI linked pension they’d expect to get for the £1.5m cap would be £47,000, (£53,500 if the link is to CPI).  An LTA of £1.5m- frozen till further notice, is not good news for DC savers either.

The best way to boil a frog is to put it in cold water and heat the water to boiling point, putting a frog in boiling water will result in the frog jumping out of the pot.

Does this matter? You bet it matters. Pensions are so complicated that they offer  those in Government numerous opportunities to take revenues by stealth. This has happened again and again to the point that Government has lost the trust of pension practitioners and more importantly, the wider population. If we are to get behind the current Government’s pension agenda- we must trust them. In this matter the Treasury appears to be behaving in an underhand manner and they should be called to account.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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