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Budget 2015: Experts slam pensions allowance cut but back inflation link

Experts have condemned the Government’s cut to the pensions lifetime allowance as a “retrograde step” that undermines the freedom and choice agenda.

However, the limit will be increased in line with CPI inflation from 2018.

Dentons technical services director Martin Tilley says: “The commitment to indexation is welcome – it’s the first time we’ve seen forward looking thinking since 2006.”

Chancellor George Osborne says £600m will be saved a year as a result of cutting the lifetime allowance from £1.25m to £1m in April next year.

Just Retirement director Stephen Lowe says: “This is a retrograde step which will disincentivise saving for many thousands of people across the country. It would be better to restrict the annual limits that can be saved and scrap the lifetime allowance. We should be encouraging managers and senior people in firms to engage in pensions, this will turn their interest off and will have a negative impact on how they promote saving for retirement.”

MGM Advantage pensions technical director Andrew Tully adds: “A 40-year-old with £420,000 would breach the £1m limit assuming 6 per cent annual growth and indexed at 2.5 per cent.

“We run the risk of putting off middle earners from saving in pensions at a time when auto-enrolment is trying to engage people in saving. It penalises those who get good investment growth. Having an annual allowance limit the amount of tax relief Government will pay so there’s little need to also having a lifetime allowance which penalises good investment returns.”

Tilley says: “It’s a disincentive for business makers and leaders and that permeats down to how they promote pensions in their workplace. Although we have auto-enrolment, some clients we have are very paternal – it’s not just about minimum contribution levels.

“Tax relief always seems to be in jeopardy every Budget, but the commitment to indexation is welcome – it’s the first time we’ve seen forward looking thinking since 2006.

“Depending on the measure of inflation used this may gradually erode the relationship between pensions and earnings.

He adds: “As a provider, we have just rewritten all of our client and intermediary facing literature. Are we going to have to do it all again? Likewise, will be deluged with transfer value requests if protection is extended?”

“We’re expecting to see similar protections introduced as we’ve seen alongside previous reductions in the lifetime allowance. It will be interesting to see how they interact with previous protections.

Wingate Financial Planning director Alistair Cunningham says: “It’s hypocritical to say that you want to give people freedom and choice but can’t guarantee a framework that isn’t attacked at the political whim of any present government.

“In terms of indexation; I’ll believe it when I see it.”

The lifetime allowance has been £1.25m since April 2014. It was previously £1.5m before being cut by the Coalition Government in the 2012 Autumn Statement.

The annual allowance is currently £40,000. In 2013/14 it was £50,000 and in 2010/11 £255,000.

The Lib Dems and Labour have previously called for the lifetime allowance to be brought down to £1m, with Labour pledging to use the money raised to fund a reduction in university tuition fees.

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. No matter what he says about the flexibilities, for those who might want a secure income, a guaranteed income for their life to match the terms of a public sector pension, £1 million buys you about £27,000 p.a. compared to £50,000 from the public sector.

    But then this government has a track record over inequality. Look at child benefit tax. one parent working earning £60k – 100% benefit clawed back.

    2 parents working earning £50k each – they keep it all.

    No joined up thinking at all from Osborne, only done it to take the wind out of Balls(up) sails.

  2. He mentioned that this will only effect 4% of pension members. As HH has stated most of this will be the Private sector DC schemes. Would he have done this if the income multiple for DB schemes was say 40 rather than 20 to calculate the LTA value for a DB scheme?

  3. So, “A 40-year-old with £420,000 would breach the £1m limit assuming 6 per cent annual growth and indexed at 2.5 per cent.” I’m sure there’ll be lots of hearts bleeding for him/her. It’s the stuff of dreams for the other 96%. Having changed things yet again it would be really nice if the next pensions minister/Chancellor felt able to leave things alone for a few years – it would make a nice change. Sensible, even!

  4. Seems like we have to be on our toes again, getting the Fixed protection registered and preparing to withdraw tax free cash before that disappears.

    Then we get the complaints from our better off clients that we have overfunded their pensions and created the excess charge, using the above example of the 40 year old, do we cap pension contributions, or is 45% of something bettter than 0% of nothing?

  5. No matter what he says about the flexibilities, for those who might want a secure income, a guaranteed income for their life to match the terms of a public sector pension, £1 million buys you about £27,000 p.a. compared to £50,000 from the public sector.

    But then this government has a track record over inequality. Look at child benefit tax. one parent working earning £60k – 100% benefit clawed back.

    2 parents working earning £50k each – they keep it all.

    No joined up thinking at all from Osborne, only done it to take the wind out of Balls(up) sails.

  6. Can someone explain why we need a Lifetime Allowance at all when we have a £40k annual allowance ?? It’s just a tax on growth.

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