I wanted to know the amount I would earn if I started on £25,000 when I was 25 and got steady wage rises of 5% pa till I was 65. The answer, according to this little modeller , is just over £3m.
So an average person on average income over an average working life earns and spends around £3m.
Put like that, capping the amount we can spend for the rest of our lives at £1m, which is what the new Life Time Allowance is asking us to do. Is limiting our capacity to spend in retirement to about a half of what we earn and spend when at work. (I’ve adjusted the numbers to take into account inflation plus growth on the £1m pension pot.
I have always found that I spend more when on holiday at work, there is just more opportunity to spend. So it’s even more incomprehensible that a conservative politician should define our ambition for a retirement income by a lump sum so low.
Put another way, our lifetime earning capacity is by far our biggest asset, the value of our capacity to earn dwarfs our capacity to save or build equity in our houses.
Relative to £3m and for people on more than average earnings, multiples of £3m, the £1m LTA is now a kind of basic private pension.
The way that Osborne talks, the 4% of us who save all our lives to get more than a million into our pensions might as well be lighting cigars with $100 notes in the Cayman islands. The implication is that we are screwing the poor by taking too much of the pension pot.
But nobody saved into a private pension unless they were paying tax in the first place. I am tempted to suggest that the majority of people George Osborne could have pissed off my this tax measure are well out the other side of paying tax on their earnings (or even their savings).
So who is this a tax on? It’s a tax on “hard working families” who want to wind down from work in comfort. It is grossly misjudged, as was the cut in the LTA from £1.8 to £1.5m.
Steve Webb is quite right in stating that tax relief should be limited on contributions and should be progressive, encouraging those earning at basic rate to save more. Webb argues for a flat rate of tax relief at 33% capped by a reduced annual allowance so that no one gets more than a £10k subsidy from anyone else to build money up for retirement.
He is right, pension planning should be about diverting a slice of income every year into a savings plan that grows in time to provide a capital reservoir which can be drawn as per an individual’s choice.
There are some who may want to invest a windfall to catch up years when they cannot contribute. But the majority of us must bet into the habit of saving at least 8% pa of our lifetime income into a tax-advantaged plan if we are to have any chance of financial comfort in our later years.
And most of us – under auto-enrolment – are getting there. The new normal is to save. But if the new normal is to have to fret about the possibility of saving too much and accidentally triggering 55% tax-bills, the joy of the thing is gone.
Of all the ways of limiting pension tax relief, the capping of the annual allowance is the most regressive. It sends out the message that investment growth doesn’t matter, that cutting costs doesn’t matter and that any kind of financial windfall resulting from markets or an unexpected capacity to contribute, must now be considered in a jaundiced light.
I hope that Gregg McClymont and Steve Webb will rally some support against the new reduced LTA, it is a pernicious tax that deprives us of pension ambition and is a charter for the tax dodgers and tax-scamsters who- even now will be working out new ways for the super-rich to subvert the legislation.
We should scrap this LTA altogether and allow people to enjoy their pension savings fearlessly.