The lifetime allowance has been rising at around 4 per cent each year since A-Day in 2006 and the industry assumed this would continue. But in his pre-Budget report speech on Monday, Chancellor Alistair Darling told MPs: “I intend to maintain the ceiling on tax relief given to people with pension funds of up to £1.8m up to and including 2015/16.”
The annual allowance will be capped at £255,000 for the five-year period. Contributions over the annual or lifetime allowance will be hit with a 55 per cent tax charge.
Rowanmoor Pensions director David Seaton says: “By announcing that the lifetime allowance and the annual allowance will not be increased in line with inflation from 2011, the Chancellor is deliberately seeking to tax those who have large pensions by 55 per cent on the amount over the lifetime allowance.
“Even those who built up large pension funds before the retrospective legislation, brought in under the misnomer of ‘simplification’, will be hit if they have primary protection, which was designed to provide protection against the tax charge up to the level of inflation. By not increasing the lifetime allowance by inflation, these people could see part of their pension fund taxed at 55 per cent.
“The freezing of the lifetime allowance also requires more people for whom no contributions have been paid since A-Day, to consider applying for enhanced protection. Even a current fund of £1.2m and an investment return of 6 per cent a year for the next seven years means the lifetime allowance will be reached by 2016. An expansion of the number of people applying for enhanced protection will reduce pension funding for the future as any further contributions will mean enhanced protection is lost.”
Aegon Scottish Equitable head of pensions development Rachel Vahey says: “It feels like the rug has been pulled out from underneath us. Many people who have planned their finances on this basis will have to go back to their advisers and see what this means in practice.”