Can the Treasury make us all pension millionaires?

For the second time in a decade, the Treasury have pulled a pensions rabbit out of the Chancellor’s hat. This time they have offered tax-incentives to keep us working;  incentives that allow us to think of retirement as future millionaires (Rodney)

To the vast majority of people saving for their retirement the changes to pension taxation will mean nothing whatsoever

To be clear. Most people never expect to pay £40,000 in a year into their pension and the increase in the lifetime allowance to £60,000, with all the attendant ways to spread the contribution, will benefit a small group of highly pensioned , high earners – most obviously senior doctors (but controversially, also long-serving civil servants and politicians). Fewer people will be caught by the annual allowance and lose tax relief on part of their pension payments.  With the taper still in place, the annual allowance is still tricky for the seriously well paid, but it means that many high earners will be rejoining workplace pensions rather than taking extra cash in lieu.

The Lifetime allowance currently impacts a tiny number (reportedly only 10,000 people paid it last year) but would have claimed more over time. Abolishing it looks like a get out of jail card for many very well pensioned people who had either lost or not applied for  complicated system of protections that enabled people to avoid paying 55% tax on the top slice of their pension. No longer will sneaky notes need to be passed to the high paid reminding them that an opt-out of a workplace pension is available and that the employer can’t be held responsible for loss of LTA protection if future contributions are received.

The money purchase annual allowance probably caught many more people than were aware of it. While the Government is not declaring an amnesty, returning it to £10,000 will mean many people who’ve raided their pension pot will be able to return to workplace pension saving without fear of losing tax-efficiency.

The barriers to saving have been taken down, we can now all dream of being pension millionaires without fear or impediment of penal taxation.

So what’s the catch?

For most people there is no catch. Most people only dream of having a pension pot bigger than £1m , contributing more than £40,000 pa or having raided their pension find they can stump up more than £4,000 to top it up.

But there will be some people who have a right to take tax-free cash from their pension(s) which is worth more than a quarter of  the current LTA  –  £268,275 and will find the lump sum capped at that amount. Not just now- but for ever.

It’s a little catch and the Treasury hopes it’s  one that most people  won’t  notice for a bit.

Steve Webb has caused this the slow  death of the tax free lump sum. But no-one will notice it is sick for a decade at least, by which time we will all be millionaires.

So what happens to all these protections?

Many people (me included) applied for a protected lifetime allowance at £1.2m up to £1.8m. These protections don’t appear to fall away but are still important if you find that you have a tax-free lump sum entitlement of more than £268,275, you can get another 25% of whatever you have over the current LTA paid to you provided;

  1. You have one of these protected LTAs
  2. You don’t exceed taking a lump sum bigger than a quarter of your protected LTA

Some people are already speculating about whether if you use your protection, you become liable to 55% tax if you have bust your protection but frankly – these are problems for tax-lawyers – not this blog.

The bottom line is that the Treasury and HMRC have gone out of their way to make sure that the highly pensioned are released from a fear that going back to work will mean that they are subject to double taxation.

Or at least that is the implication of embedding these pension taxation reforms in the “back to work” agenda.

Will it work?

Well you can’t fool all of the people all of the time.

The package of pension taxation reforms is not being met with enthusiasm by those whose social agenda is about “levelling up” (for details read the whole thread)

It doesn’t even get universal approval from experts on taxation for clinicians (for details read the whole thread)

Will it encourage people (other than the affluent) back to work, probably not. There are a lot of other methods (mostly punitive) that the Government has to get the 800,000 non working over 50 year olds into employment and you can read about them in yesterday’s blog.

I got a mail from the DWP with two attachments, one contained the measures to get us back working and the other the measures to boost business confidence and encourage growth. The pensions we get depend on the strength of our businesses so the two attachments talked to each other but I actually see the pension reforms as more important to the senior managers of our businesses than the business measures to those with pensions.

These pension reforms are about giving the mass affluent something to feel good about and are a gift to the wealth management industry.

By far the biggest beneficiaries of these pension schemes will be those who profit from greater flows into our pensions from the 20% of savers who provide advisers with their  value.

Unsurprisingly , the insurers and asset managers are thrilled

What will be the impact of the reforms?

There is a lot of money currently outside of pension wrappers which will be switched into SIPPs and to a lesser extent workplace pensions. This is money that can now attract tax-relief on the way in and get tax free growth and a partial exemption from tax when drawn down.

Importantly for the wealth management industry, there was in the budget, no movement forward of the Minimum Normal Retirement Age and no move to tax bequests of pots where the pot-holder dies before 75, nor was there a move to remover the benign tax environment on bequests of pensions for those with pots who are older than 75.

In the short term , I expect to see a flood of money , using unused reliefs and the new higher Annual Allowance over the next year.

I also expect to see more confidence in saving amongst younger savers , aspiring to have million pound pots. They no longer need fear the LTA and the impact of a frozen tax-free-lump sum will not offset the advantages of tax and national insurance saving on the way in and tax-free growth on the way.

This will ripple down to those less sophisticated people who don’t save for a living but are aware that pensions are becoming better.

The hope is that the general public will feel energized to take positive steps about their retirement , the risk is that pensions are branded a rich man’s plaything.

I suspect that more people still watch Del Boy and Rodney than read reports from the Resolution Foundation.

Pensions are no better and no worse for the vast majority of people. But Cash ISAs , despite having no tax advantages for most people over money held in high interest accounts, continue to attract savings from those who aspire to have a savings tax problem

There is a perception that what is good for the affluent is good for everyone and this pension tax giveaway may encourage even those with the smallest pots to think big,

On this basis, the phoney giveaway is justified by the end not the means.

But as Mike Harrison points out.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Can the Treasury make us all pension millionaires?

  1. emigreeu says:

    In 43 years time a million will buy you 4 Mars bars

  2. Eugen N says:

    Henry, I think he has a second measure for next tax year. Introducing minimum withdrawals from a certain age like 70, 72 (like in the U.S.) or 75, to keep it simple.

    If for example a 5% is at 75, and by age 85, it grows to 10%, lots of tax relief would be recovered. DB pensions would not be affected, they should be started by age 75, as per their own rules.

  3. Ian Davidson says:

    Henry, a good post on a complex issue. By coincidence I met with my financial advisor on the afternoon of the budget. He made many of the points you have, particularly with reference to the tax free cash issue. I am fortunate I have protection in place, You make the excellent point about long serving civil servants and politicians. I guess, and I have not got data to prove this, that there are vastly more civil servants who will benefit from this than medical consultants. I also find it deeply deeply ironic that on a day that the BMA had doctors on strike and they “demand” a 35% increase in pay yet pension tax allowances are radically changed largely at the behest of the BMA for NHS consultants. The other major issue, and you touch on it, is the impossibility of long term pension planning when the rules undergo massive changes every few years. Finally, the biggest scandal of all are the large number of low paid with inadequate or non existent pension provision. Anyway, Keep up the good work

  4. Bored Actuary says:

    “There is a lot of money currently outside of pension wrappers which will be switched into SIPPs and to a lesser extent workplace pensions. This is money that can now attract tax-relief on the way in and get tax free growth and a partial exemption from tax when drawn down.”

    I’m not quite sure there’s much to be gained from doing so. Take a DC investor who expects to hit the current LTA round about retirement time. They take a quarter of this tax-free, and the rest will be drawn down (at let’s say 50k p.a.) with 12.5k tax-free and the rest at 20% income tax. Overall average tax rate is around 11.25%, If they now increase contributions (saving 40% income tax on those contributions) to take their pot above the current LTA, the marginal extra in the DC pot results in (a) no additional tax-free cash, and (b) any increase in drawdown taxed at 40% since it will all be in the higher rate tax bracket. So the tax savings (other than on investment growth) will disappear, so tax-wise things end up much the same as an ISA, but with the risk of being a hostage to fortune of future pensions tax changes.

    For those in a DB scheme, however, the benefits are much more obvious since the employer is shouldering most of the cost, and even if with the resulting pension income taxed at 40%, it’s still “free” money that would otherwise have been foregone on opting out of the DB scheme.

    But for DC members who expect a substantial pot already, it’s not clear to me that the ability to go beyond the current LTA is actually that much of a draw.

    It would be interesting to reverse engineer to treasury’s cost estimate of these changes to see what their estimate is of people increasing DC contributions, and hence avoiding income tax (and a bit of NI).

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