he appointment of Ros Altmann as Minister for Pensions might well spell the end of the Lifetime Allowance (“LA”). The LA is aimed at limiting tax avoidance linked to pension saving but is, in my opinion, a fairly blunt and flawed tool. The LA is misaligned with defined contribution savings, being based on accumulated savings rather than contributions. The measure also has a tenuous link to defined benefit savings, being based on a fixed conversion ratio of benefit/income to savings rather than on a conversion ratio related to market conditions at the time of the tax assessment. The incoming Minister for Pensions has publicly stated her opposition to the LA, so some change might lie ahead.
The LA was introduced in the 2006/7 tax year, at a level of £1.5m. It reached its peak in the 2010/11 and 2011/12 tax years at £1.8m before it started being cut. The latest cut, announced in the 2015 Budget but relating to the 2016/17 tax year, will take the LA to a level of £1m. This cut was explained in the Budget as being necessary to protect public finances from the growing cost of Income Tax relief for pension saving. The cut did, however, come in the midst of an election campaign, around the time the Opposition was rumoured to be considering the same cut but perhaps not for the same reasons. I’ll leave the conspiracy theorists to make their own decisions as to the drivers behind the Budget announcement and the sequence of events.
On the morning of the Budget, the incoming Minister for Pensions tweeted “Let’s hope stories of cutting pensions lifetime allowance to £1m aren’t true – it would be dreadful policymaking!” as rumours of the LA reduction spread ahead of the Budget announcement. She added, in response to further comments, “Scrap it altogether!”. Her post-Budget blog was also unambiguous, stating that “cutting Lifetime Allowance for pensions is really bad policy”.
The new Government has, what appears to be, a fairly busy legislative agenda with some significant policy decisions. Pensions-related matters might have to wait some time before being addressed. However, we have a Minister with a clear position on a policy. How soon until we see that view being followed through? I hope for the abolition of the Lifetime Allowance, particularly if this change signals a regime where there is consistency between policy intent and incentives.
Any scrapping that does happen will probably come too late for me. Maybe for others too.
My DC pension savings are on a (hopefully!) inexorable march to the £1.25m current LTA in around 5 years, when I had planned to retire. Investment growth alone should take them there. The chancellor’s cack-handed reduction in LTA to £1m now means I either pay an extra £63k in tax due to the lower LTA, or take FP16 (assuming the same pattern as FP14 etc), make no more contributions, and forego around £40k in employer match.
Neither of these appeals at this stage in my career, so I’m planning on a third option — retire now rather than in five years time. I can live with the reduced income, and five years of not working is easily a better option than either a large and unplanned-for tax or large foregone employer contributions. So… the government doesn’t gain, but in fact loses a decent chunk of revenue from me — five years less tax and NI on my salary — with its LTA reduction. Not my problem.
I’m going to quote you on that – anon!