I wanted to start my new column for Money Marketing with a subject that has been hitting the headlines again: the dangers of the constant reductions in the lifetime allowance. I have always thought the lifetime allowance to be illogical, unfair and undermining of long-term pension investing.
The most recent reduction to just £1m (having been £1.8m in 2011) has not only compounded the problems for those in defined contribution schemes but is also causing major issues for defined benefit scheme members, which is damaging the National Health Service and other public services.
Huge numbers of doctors are quitting general practice in their 50s, partly due to the lower allowance and the wish to avoid the potential 55 per cent pension charge. It is vital to take these issues seriously in our ageing population. Surely we should be incentivising the most experienced medical staff to keep working longer, not encouraging them to retire early by imposing draconian taxes on their pensions? The same can be said for the likes of surgeons, police chiefs, firefighters and head teachers. The lifetime allowance reductions are like a stealth tax on the most senior personnel.
The Government should be concerned about the impact of this tax raid on pensions, worsening skill shortages in the NHS and damaging the labour market more broadly. Older members of DB schemes are a valuable part of our workforce, with years of experience under their belts. We should be encouraging them to stay working longer, not driving them away too young.
The problems the lifetime allowance creates for DC pension savers are perhaps even worse.
Indeed, while it allows public sector workers and other DB scheme members to have up to £50,000 annual pension, members of investment-related pension plans could not buy an income of anything like that much a year with a £1m fund. Annuity rates have plunged so low that £1m would not provide much more than £20,000 index-linked pensions from the age of 60.
This highlights a further unfairness of the lifetime allowance. But the whole concept is just so illogical. Ever since it was introduced, I have argued it makes no sense to limit the amount built up in a DC pension. If annual contributions are capped, then arbitrarily limiting the total fund that can be built up over the years amounts to a penalty on good investment performance. It particularly punishes pension investors if their fund performs too well, which goes against the whole ethos of long-term investing. Surely we want people to build up as much as they can?
“Ever since it was introduced, I have argued it makes no sense to limit the amount built up in a DC pension.”
It is time for the Government to rethink its pensions strategy and address the damaging side effects of the lifetime allowance cuts. With rising longevity, an ageing workforce, shortages of experienced workers and inadequate levels of pension saving, it is important to avoid perverse pension incentives. Abolishing the lifetime allowance would go some way towards offsetting the damage already done by the latest clampdown.
We must not let our pension system impose stealth taxes on older workers and drive them out of the labour force. Nor should we penalise people for achieving good investment returns. Pensions should be about rewarding loyal workers and encouraging long-term investment.
Ros Altmann is former pensions minister