The adjustments the Treasury has made to their much trailed proposals have concentrated the impact of the new measures on the super pension rich who will now pay super pension taxes and this is a good thing.
What is not such a good thing is that the supposed £4bn pa saving to public funds is not justified by the measures taken.
There are two revenue raising measures. The capping of contributions to £50,000 pa known as the Annual allowance or AA and the capping of the maximum amount that can be drawn from a pension known as th Lifetime Allowance or LTA- this has been reduced to £1.5m.
The Treasury state that there only 100,000 people who contribute or have contributions on their behalf to their pensions in excess of £50,000 pa.
The Treasury say that they will only be raising £0.5bn pa from reducing the LTA.
We must assume they expect the changes to the AA to generate £3.5bn. They are proposing that above £50,000 contributions do not get marginal tax relief (eg the difference between the 20% rate and the individuals highest rate of tax – either 40 or 50%).
Even if we assume that the Treasury could recover 30% of these excess contributions (which won’t be the case as many of the contributors don’t pay the 50% super tax). They would have to see total contributions of 3.33 X £3.5bn to hit their revenue target. That’s over £11.6bn from a constituency of 100,000 people. It assumes that the average super rich pension contributor will be paying £116,000 above their £50,000 limit or £166,000 in total. As the Treasury know, the super-rich are super clever – this is not going to happen.
So where is the balance of the Treasury’s revenue forecasts going to come from. Not from the LTA according their numbers – are we missing something?
Well yes we are. Hidden in the Treasury’s report is the following statement.
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)
That’s the Treasury’s get-out clause and you may think that the LTA valuation factor is a pretty obscure number – well it isn’t.
Put simply, the LTA valuation factor is the multiplier that converts the amount you get as a pension into a cash value.
For instance, your basic state pension pays you £5000pa. Using the LTA valuation factor it is worth £100,000.
But what if the Treasury was to use an LTA valuation factor of 23.6? Well your basic state pension would now be valued at 23.6 x £5000 or£118,000. Your pension wouldn’t be any bigger but it would be £18,000 more valuable.
So why did I chose 23.6 – is it a random number? Well no. Accompanying the Treasury Press Release and Report was a report from the Government Actuary which includes this;
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.
Now the Government Actuary is no fly by night figure – he is in charge of a non Governmental Organisation that provides independent advice which is supposed to be authoritative.
The Treasury have simply ignored his recommendation.
They have chosen to ignore his advice that people are now living longer and that the forecast for long-term inflation and interest rates is lower than it was a few years ago.
Well not quite ignore – they have actually agreed with the Government Actuary when on these things with regards to annual allowance and ignore him with regard to the the Lifetime Allowance.
Now there’s nearly 20% more about 23.6 than 20 which means that the Treasury have the option – simply by adopting GAD’s recommendation to hike up the impact of the LTA by 20% which, given the fact that the baby-boomer generation is in the midst of retirement will hit a lot of the very rich – if not super-rich and might get the Treasury to their £4bn revenue saving.
I may not be bothered with regards to the amount of tax that the super-rich or even the very rich are paying but I am bothered that the Treasury can play fast and loose with the Government Actuary’s recommendations and with our understanding of the value of pensions.
Because if they behave like that with the rich, they can play like that with the poor and with “me” and I’m neither rich nor poor. It’s a matter of credibility – of integrity and of trust.
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