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Govt to cut pensions lifetime allowance to £1m

Chancellor George Osborne is set to announce a further cut to the lifetime allowance for pension tax relief in tomorrow’s Budget.

Osborne will reduce the amount people can save into a pensions tax free to £1m, down from £1.25m, to pay for tax giveaways elsewhere, The Sun reports.

Last April, the allowance was cut from £1.5m to £1.25m.

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 41 comments at the moment, we would love to hear your opinion too.

  1. Let’s hope he doesn’t cut the rate of tax relief on contributions, that really would be a bummer.

  2. Why, why why? Please leave the system alone. You should be encouraging people to save. What next an upper limit on ISA savings? An upper limit on property assets? An upper limit on cash in the bank?
    Stop tinkering and wasting time and money!

  3. Let me guess: Fixed Protection 2015 and individual protection 2015 to add to Fixed and Individual 2014, Fixed 2012, Enhanced, Primary…….

  4. How utterly counter-productive.

  5. You gotta be kiddin me!

    This makes any long term planning impossible. Drives and even wider wedge between public and private pension provision and demonstrates a complete and utter lack of understanding!

    …Hang on, according to the Sun…ok, breath again!

  6. Just crazy, absolutely crazy.
    JUST LEAVE PENSIONS ALONE SO PEOPLE CAN PLAN WITH CERTAINTY – AND DON’T USE THEM AS A POLITICAL FOOTBALL.

  7. OK not voting for them either now. This is just mindless politicking. They are starting to make UKIP look sensible!

  8. This is the hand of Clegg and political bargaining.

    Governments are not interested in serious pension saving – nor are they truly engaged with it. If they themselves had Personal Pensions the whole thing would be quite different.

    The just want ‘the lower orders’ to have a pot small enough not to hurt the Exchequer and large enough to keep the benefits bill down. Hence the rubbish they call AE.

    Ken Bannister is near to the truth. All this could well be the precursor to a full blown wealth tax – after all that is exactly what the present limitations on pensions are. What is truly frightening is that if this is what a (supposedly) Tory Government is prepared to do what will the other nuMPties do?

  9. I was originally doing planning for clients based on the 1.8million lifetime allowance that has now blown out of the water by successive governments.
    Pension simplification my ar**. This is completely stupid. Until MP’s pensions and judges pensions are brought in to line with the same rules that are being imposed on the Private Sector this is building up a massive two state system i.e. those in the private sector and those working for the Government and it’s quangos. This is not sensible democracy and it is unjust. It is like the Roman’s and their use of the Games and Dole to keep their populous from rioting, but the wage slaves don’t get an effective vote.

  10. Scandalous.

    Those entrepreneurs who make this country run and don’t have access to cushy occupational pensions are being are being screwed over here.

  11. At this point i would sacrifice any potential changes to the rules that would benefit clients for a guarantee that the rules wont change for 20+ years.

    As commentators above have mentioned, how are we to begin helping clients save into pensions if we expect each and every new government to move the goalposts?

  12. Pension allowances come down as ISA allowances go up…its plainly obvious exactly what is going on here…

    In recent years we have more and more clients maxing their ISA’s than equivalent pensions. Whether its fair or not or makes sense to clients is irrelevant to Osborne..its just reducing the tax burden on the exchequer….

  13. Ancient Britain 17th March 2015 at 1:45 pm

    It does seem complete madness. I thought the whole point was to get people to take responsibility for funding their pensions and to save as much as possible. Keep cutting the LTA is just counter productive and will start to bite more pension savers. Presumably he has only done it to spite Labour and the Liberal Democrats. Don’t you just love politicians.

  14. This will further encourage questionable tax avoidance schemes. Previously you could put substantial sums aside and receive tax relief on the contributions. Things were balanced when you retired and paid tax on the pension received. This is just another case of short term planning. George is hoping to increase tax revenue from this measure and from allowing people access to their pension pots. Frankly it’s not what you would expect from the Conservatives whose mantra is that we should look after our finances so we are not a burden on the state.

  15. Why are all these comments talking about disparity between private and public pensions? This is the LTA for all registered pensions in the country, not just for personal pensions.

  16. This looks like a Sop to the Lib Dems in return for them giving ground on IHT. The Tories can always kick it into touch if as expected the Lib Dems get their arses kicked!

  17. @ Paul Williams
    May I suggest a quick skim of J04!
    The reason for highlight the wedge between public and private sector schemes is:

    Current LTA of £1.25m allows a public sector employee to receive a guaranteed, index linked pension with spousal benefits of £62,500.

    For a private sector employee with a money purchase pension, to buy a SECURE index linked pension, he will need close to £3m of pension fund (depending on age, health etc).

    That is why “these comments talking about disparity between private and public pensions? This is the LTA for all registered pensions in the country, not just for personal pensions.”

  18. Paul pension pot of £1 million, assuming used to purchase an annuity, would using today’s rates, and assuming no health issues etc., provide a pension in the region of £28k per annum with built in RPI indexation and 50% spouse pension at age 65. Any pension pot above £1 million crystallised would attract a LTA tax charge.

    Someone in an occupational pension, usually the public sector these days, could receive a pension of £50,000 p.a., with RPI indexation and 50% spouse benefit, but this would only be valued at £1 million for LTA purposes.

    This is where the disparity is.

  19. Dare I say it, but it does beg the question when will they start taxing ISA? E.g. bringing in a tax charge for any amount held over a prescribed limit.

    After all I suspect there are quite a few millionaires who have invested in TESSA, PEP and ISAs since their start.

    Always be wary of skint governments!

  20. Paul Williams ~ Traditionally, large swathes of the public sector, typically MP’s and other civil servants, have been exempt from the restrictions imposed on the private sector, though this may have changed in recent years.

    What, for example, is the capitalised value of a fully index-linked public sector pension from age 60 of, say, £50,000 p.a. with a 50% widow’s pension? Well over £1m. So we’ll see what happens, eh?

  21. E L Wisty (an only twin) 17th March 2015 at 4:19 pm

    I don’t know what all the fuss is about. Surely, even if the Lifetime Allowance is cut to peanuts, we all have our trust funds to fall back on.

    Oh, I forgot, only George and David are in that nice position where they can screw up the pension system and not have any worry about the personal consequences.

  22. There needs to be a revision to the maximum you can build in a defined benefit scheme. The disparity now has become huge. We can’t have government workers and MP’s on a different regime where they can fund towards £2m and yet impose a draconian tax charge on the private sector pension if it goes over £1m.

    It also penalises good investment performance. This needs revision and would be nice if the industry lobby groups got out of bed and did some lobbying.

  23. To equalise db schemes and money purchase schemes all they need to do is increase the multiple on the db scheme from 20 to something like 40. That would make it fair. Is an income of £30k not a fair amount to live on which is funded by the taxpayer ? If people want more should they not have to pay their taxes? I personally don’t have a problem with the new limits. I acknowledge that it does mess with the planning side of things and they should have decided on a limit in the beginning. Having said that I can understand how by reducing it gradually you ease the pain for those already with large pots, even if it is not necessarily fair? Plus they are going to have to pay for all the non tax payers who can contribute £2880 net to a pension and get £720 tax free with careful planning! Happy days more need for advice.

  24. Gordon Brown started the attack on pensions and they have been seen as fair game ever since, unless of course they are Public Sector where dividend tax deductions do not apply and LTA contractions have little effect due to the generous capital value formulae. Politicians talk about sharing the pain, not when we have a two tier pension system in this country which protects the interests of the rule makers and the armies of cronies who are employed by them.

    As other commentators have already mentioned, these attacks on hard working middle England are likely to encourage more tax evasion in the future.

  25. Public sector pension schemes that MPs and senior civil servants are in should be scrapped. They should have to buy their pensions in the market place in the same way as everyone else who is not in an occupational scheme. Only then will they have a proper understanding of pensions and thus see sense.

  26. What really annoys me, what really makes my blood boil, is that the slightest hint of any tinkering with Public service pensions and the country comes to a standstill as the unions bring everyone out on strike!

    But for everyone else….

    Not 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.

    As for Labour and the Lib Dems….

    …End of Pre Budget Rant…

  27. Just when pensions were looking interesting again the coffin lid is slammed back down and screwed….This is not a vote winner and Mr Osborne should have that rammed down his throat.

  28. Ancient Britain 18th March 2015 at 10:13 am

    HH, well said. I couldn’t agree more. I think the inequality stems from the Government and politicians in general being so far removed from the real world that they are just ignorant of the affect of some of their changes. The child benefit tax is an excellent example, which has resulted in discrimination against women or men who give up work to bring up their children or take a lower paid job to fit in with school times.

    Hopeful if the £1m LTA limit does appear in today’s budget he is only introducing it as a short term political manoeuvre (assuming that he is the next Chancellor!).

  29. £1m into a tax relieved savings vehicle like a pension still seems quite attractive to me. Quite a nice aspirational target for people to go for (especially if as osbourne said it is going to inflation linked). So you fill up your pension and then look at alternatives.

    Regarding unions protecting pension schemes for their members, isn’t that their job??

  30. Dave: You’ve overlooked that if you’re careless enough to put £1m in your pension, all growth is then taxed at between 25% or 55% (on top of 10% dividend tax), plus income tax when you take it out. For being selfish enough to put money aside for your retirement and invest it in British businesses.

    And that’s assuming a future government doesn’t cut it to £750,000. Or £500,000. Or £250,000. I mean, you don’t have £250,000 in your pension fund, do you Mr Clapham Omnibus? So why should anyone else?

  31. As Sascha implies although I have always been one of those advisers who has been positive about pensions, that was fine all the time there was not a limit on how much you could build up in your pension, there were just limits on how much you could put in and when. When it changed to the only limit on what you could put in was how much (if any) tax was deferred until crystallisation and replaced with a realistic and increasing lifetime allowance, that was fine, but now they are ratcheting it down year on year, the message is that pension are now not worth putting serious money in to unless you are so close to the age you can draw it, it is worth taking the risk that further punitive taxes will not be applied.
    If we recommend something to clients, we have to report why it is suitable…. why do politicians get away with changes which they could not justify under any basis of logic or suitability.
    Planning…. what planning…. make us study level 4 exams and then keep changing the goalposts. It is hard enough for us to keep up with the continual changes, goodness knows for anyone who just wants to go out to work, earn a reasonable living, defer some of their income until later age (called a pension) and not be taxed twice on the same earnings.
    The lifetime allowance now as Sascha says will result in quite a lot of middle earners being taxed TWICE on the same income if they are in the Private Sector whilst their Public Sector peers now earn higher salaries, get bigger pensions and whenever there is any suggestion they should be brought in line with what happens in the private sector (including retirement age) threaten to go on strike.
    If it wasn’t for the fact I like my clients and they are the same people being continual stitched up, by successive chancellors (of all colours) I’d suggest a financial services strike……

  32. Surely this is the trade off for being able to pass your pension fund down generations without the 55% tax charge?

    Also, does anyone actually know what percentage of the population this will actually effect? I would suspect that it is very small.

  33. @James

    He stated in the budget that this would only effect 4% of pensions.

    This is however only due to the unfair basis in which the lifetime allowance is calculated for DB schemes. If it was the same as DC schemes where £1m will buy £27,000pa of pension then the % in DB schemes (including civil servants etc) would be significantly higher and politically something that even Mr Osborne would have thought about a little more carefully about! IMHO of course….

  34. it will effect more than they think as many DB members were making extra contribs through a FSAVC or latterly a PPP to maximum fund.
    there will also be Directors who bought their commercial premises thru SIPP & SSAS hit by this as once a loan to purchase has been repaid the rent can build rapidly to a decent sum and cannot b discounted from a market rent.
    The issue is the reversal of previously agreed legitimate retirement & tax planning for political ends alone. Trust in pensions for senior management will be reversed.

  35. Jabba and Mr Castle, to directly address the issue of the “unfair” treatment of DB schemes and the negative effect on trust in pensions for senior management, to my knowledge there is nothing to stop private companies setting up DB schemes. The trend has obviously been to close them down for a variety of reasons, but if the facts change, adopt a different strategy. Maybe new DB schemes will be a growth area?

  36. James, its Phil unless I am in trouble with Mr mother in which case its Philip 🙂 The point I am trying to make is it is not just a matter of minor tinkering, it is completely moving the pitch being played on BY THE RULES from Football, to if we are lucky Australian rules football or American Football and the frequency and extreme swings make it more like trying to play water polo with a horse than football! We learn the rules as coaches and start explaining them to our players (clients), only to turn up on match day (retirement) to find the game has changed.
    Still better than being in Syria or any part of the non state of Kurdistan……… at least we can complain without being tortured.

  37. I will call you Phil henceforth. With respect, I don’t think that the “turning up on match day (retirement) to find the game has changed” analogy is quite correct, as that is where the available pension protections come in. What it does do is increase the need for professional advice. Bad for clients because there’s a cost to them. Good for advice professionals.

  38. Renshu Cornelius 20th March 2015 at 3:24 pm

    Using myself as an example here as I am by no means a high earner, and I’m in my early 30’s, basic rate tax payer & quite a reasonably savvy investor & I’m making contributions of 7% p.a and I have the benefit of being in a scheme where my employer doubles what I pay in – So effectively 21% p.a – If I am able to replicate the returns I have achieved in the past 12 months through switches & trades then my current MP fund of aprrox £48k would exceed the LTA in just 10 years. This doesn’t impact just 4% of pensions! The potential impact here is significantly huge.

  39. Why do they have to keep moving the goalposts on what is supposed to be a long term product? And I feel like needing a crystal ball to understrand what might happen in 20 years time.

    What am I to do? I am 40, and have saved very hard, and had good investment returns to take my pension fund now to £750K. My employer chucks in 20% in return for me putting in 6%, and I am also in the salary band where my effective marginal tax rate is 62% (£100K to 120K).

    Should I:

    1) Apply for Fixed Protection 2015, so I can protect to £1.25m and make no more of the generous contributions – but as a previous poster said it would appear that £1.25m would not be index linked, so by the time that I come to retire the £1m limit will have surpassed £1.25m anyway

    2) Expect that the government will change their minds again anyway, so what is the point of worrying about fixed protection – it won’t be relevant in 2035…….

    3) Put the minimum in to get the maximum employer contribution, regard it as free money and accept that tax at 55% isn’t as bad as tax and NI at 62%?

  40. @David – good questions, but why do they have to be asked? because a) No politician understands the impact of changing the goalposts half way through and then changing them again two thirds of the way through and then again three quarters of the way through the long term planning game or b) because policiticans do understand but they do not care or c) because they need tax receipts now and in the future to make up the deficit and do not want to admit that is why they are doing it.
    maybe d) all of the above is the answer

  41. @David – good questions, but why do they have to be asked? because a) No politician understands the impact of changing the goalposts half way through and then changing them again two thirds of the way through and then again three quarters of the way through the long term planning game or b) because policiticans do understand but they do not care or c) because they need tax receipts now and in the future to make up the deficit and do not want to admit that is why they are doing it.
    maybe d) all of the above is the answer

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