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Altmann: Stop the lifetime allowance cuts

Ros Altmann

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

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Comments

There are 20 comments at the moment, we would love to hear your opinion too.

  1. quite right but what does any govt. care because they have their gold plated pensions.
    I have argued that this life time allowance cap is a disgrace and their is no reason FOR IT.
    AUTO ENROLLMENT IS NOT THE ANSWER !!!!!
    WHY SHOULD PEOPLE NOT BE ALLOWED TO SAVE FOR THEIR RETIREMENT!!!!

    • I totally disagree with you. Auto enrolment is the best thing to happen for pensions in 30 years. In fact the starting amount should be doubled for both staff and employers to give staff a chance of a decent amount when they retire. People ARE allowed to save what they want but truth be told very very few ever save into a pension scheme as they have never been told just how important it is to start right away to get a decent pension. Most people will need about 75% of their final salary to have a good lifestyle in retirement unless they are higher earners when approx 50-60% will probably do. When I was a kid we were NEVER given financial never mind pensions advice. Younger people still don’t realise the importance of pensions investment but it should be taught in schools as part of the curriculum.

  2. Surely the LTA is necessary to stop the savvy from avoiding any IHT. However, I do agree £1m is too low and forces Members to play the LTA Game by crystallising benefits before they need them, it also forces Members to take more income than they need before age 75, in fear of falling foul of the additional test.
    With no LTA, the latest and greatest advice would surely be to contribute all the assets you can into a DC Pension Scheme before you pop your clogs (before you reach 75 for the added tax relief bonus) and then when you’ve gone, pay it all out to your Beneficiaries’ tax free…
    = DC Pensions with the main purpose of being IHT shelters.
    So… we either have a Lifetime Allowance or we have yet more rules restricting (and likely taxing) excessive death benefits (something the LTA does now).

  3. Hear, hear… I couldn’t agree more. We all know why the government introduced and subsequently reduced the lifetime allowance – tax, tax and more tax to shore up the exchequer’s spiralling deficit. Many hundreds of £millions have been effectively stolen by HMRC’s raid on people’s pension funds. Ros is absolutely right, the unforeseen consequence has been to encourage many senior people to retire early or leave their employer’s pension scheme because the incentive to carry on has been so badly affected.

  4. With regard to the impact the LTA has on those luckily enough to be Members of UNFUNDED public sector DB Schemes, if you cast your minds back to the not to distant past 2014/15, the Government did try to alter the largest of these (the NHS Pension Scheme) which saw strikes galore and almost every man/woman and his/her dog/cat up in arms/legs, finally ending in a move to an averaging method of calculating your final salary (not much of a cost saving when you consider the size of this beast that up until recently, 2010? off the top of my head, the Government had absolutely no idea of its size/burden).
    No doubt I’ll be shot down in a ball of flames here, but someone needs to say it and as a 33yr old, it’ll be my generation paying the lion’s share of these liabilities so here goes, “we need to get real with these Unfunded DB Schemes”. If you step back and look at the bigger picture, the only option the Government has had without public annihilation, is to restrict the Net benefits by reducing the LTA for all.
    Someone is going to have to pay for these gold plated unfunded public sector DB Schemes and it won’t be the current decision makers, but their children and grand children.
    The NHS is the largest employer in Europe and actually boasts on its website “The NHS Pension Scheme is one of the most generous and comprehensive in the UK” https://www.jobs.nhs.uk/about_nhs.html
    I concede that the NHS is awesome and we are the luckiest citizens in the world to have the use of it, but the question is can we really afford it? Honestly?
    I see paying for Public Services as being like paying Housekeeping money to a stay at home Wife or Husband, necessary but not sustainable if the costs exceed the earned income generated by the working spouse (i.e. the taxes paid by the Private Sector).

  5. Trevor Harrington 20th April 2017 at 5:55 pm

    Does not matter what you think …
    The fact is that the Country cannot afford to give the tax breaks to people who want to fund their pensions extravagantly ….

    Start from the point …. there is no money ….
    Then advise from where else you are going to cut Government expenditure …. and you might have a case to put …

    Just to argue the moral, socially desirous function of your point is a completely sterile argument …

  6. I agree stupidity in the extreme, short term measures by the government. Yet potentially ISAs could build just as large a fund, particularly if the allowance continues going up. No tax relief going in, but you could build a large fund without tax largely. Then no tax on income or gains? Do you think they might cap ISAs?

  7. Christine Brightwell 21st April 2017 at 8:38 am

    I have no problem with a LTA but it does need to be realistic so probably c£3 million by now and the annual allowance needs to be scrapped. As we get older, and have hopefully paid off mortgage we have the ability to save more so that we are not a burden on the state – the old balloon payment made by many self employed/small business owners comes to mind.

    And 33 year old Phil, many off us oldies are still supporting the 33 year olds and their families financially because housing and child care etc are now so expensive. So, you may need to look after those who looked after you when the times comes. Not all of us baby boomers are up to our eyes in money, rather a lot has already gone to support adult children, some aged 33

    • Hi Christine,
      Sorry I meant it will be the younger generations whose taxes will service the huge amounts of debt the country is taking on year on year and also honor these huge DB promises. It’s bloomin’ frightening!
      On a lighter note, you don’t fancy adopting another 33yr old do you?

  8. Wesley Harrison 21st April 2017 at 9:17 am

    Dear Phil & Richard

    Agreed the NHS is great and unfunded schemes need reforming but…

    Tax take on LTA charges £126m
    Cost of pension tax relief £50bn+

    Seriously… the LTA charge is irrelevant in government budgeting and an unnecessary complication of the system.

    Trevor – If being fortunate enough to be able to maximise pension allowances is extravagant, then what world are we living in. Chances are those that can, are employers and pay significant amounts of tax (in its various guises) anyway. So congratulations to them for putting themselves in that position, I too one day would like to be able to do the same. It’s aspirational.

    Most people close to or having exceeded the LTA are mainly there due to good performance and past contribution limits. Those of us in our 30’s are unlikely ever to get near that level because when we start earning enough to be able we’ll be capped at £10k not £40k anyway.

    Phil – there is a cap on annual pension contributions therefore you cannot put everything you have into them. Reduce the cap (controversial) and the tax relief and the impact on “where is the money going to come from” will be far greater than losing a tiny £126m in any government budget.

    The LTA needs scrapping, simples!

    • Hi Wesley,
      The AA caps the tax relief received. In theory you can contribute what you like into a pension scheme.
      But I do agree with you on the tax take. However, I see the LTA tax charges as more of a deterrent at the moment, time will tell as more deferred pensioners tick over 75 and are forced to crystallise.
      If we remove the LTA, then more rules and caps will come to counter the risk of using pensions to avoid other taxes.

  9. Trevor Harrington 21st April 2017 at 9:27 am

    @ Christine and John,

    You miss the point ….

    If you want to increase the LTA you have to argue where you want the Government to get the money from …

    There is no money left in the Government coffers, and we are massively overdrawn at the bank (National debt and budget deficit).

    Women have had 7 years state pension taken off them, and men have had 2 years state pension taken off them, and bot have effectively had ALL their SERPS pension removed from them entirely.

    The net reduction in state pension benefits for my wife and I is well in excess of £200,000 during our expected lifetime.

    It is only when people get these benefits returned to them that you could then consider increasing the LTA.

    In the meantime, it is far more likely, and in the light of the above it is perfectly justifiable, that the higher rate tax relief on pension contributions will disappear, and all pensions apart from the state pension, which are already in payment in excess of £40,000 per year will be super taxed …. and in my opinion …. the sooner the better ….

    People cannot wait until age 67 for their state pensions, especially if they are physical workers and, particularly since they have been promised state pensions at age 60 and 65 for their entire working life !!!

    • You said people were promised they would get their state pension at age 60 for women and 65 for men. Well I will dispute that because as someone considerably older than you I can safely say that no government ever promised that. If you can show us evidence of which government promised this and when then you could have a good case on human rights grounds. However as no actual “Promise” was ever made and no government ever said the retirement age would stay the same and something else for you. By the time I retire I will have completed 52 years of work and my “Gold Plated Pension” will be worth around £70 a week after nearly 20 years in public service. The people getting the “Solid Gold” pensions are those on huge salaries and not those of us at the bottom who earn slightly more than the living wage which with us not having pay rises for the last 8 years means the minimum wage will overtake our wages within four years. OK I’m off to enjoy that expensive foreign holiday in my back garden as I can’t afford to holiday at home much less abroad. I bet you can though.

  10. ”If you want to increase the LTA you have to argue where you want the Government to get the money from …”

    according to Wesley above this is £126m …… which is a small price to pay to keep experience in the NHS.

    the reduction in annual all’ce and/or relief at basic rate only is where the Government could make the large savings

  11. Basically the LTA is an impost on those who can afford to and wish to save. The limit gels with Parliamentarians because they want people to save – but not too much, we don’t want you getting rich or stopping spending in the high street.

    Why do you suppose there is this perceived unaffordability in hosing for the young? Because those caught in the LTA buy BTL as an alternative. Perhaps if these was no LTA at all there might be less of a housing crisis.

  12. Ooops Housing not hosing.

  13. I can confirm Ros Altman’s account of NHS consultants retiring early because their pensions are “too big”: until recently my wife worked closely with an ENT consultant in his late fifties who decided to retire precisely because of the impact of the reduced lifetime allowance on his pension fund, plus various complicated issues to do with the recent changes to the NHS pension scheme, which would leave him paying a ludicrous marginal rate of tax and a worse pension.

    It is utterly crazy that such a highly qualified person, who still had 8-10 years of practical, training, intellectual and administrative contributions to make if only he were encouraged and felt valued, should feel it necessary to retire early. He didn’t want to retire, was grateful for a lifetime of full employment, but did not see why he should be so heavily penalised if he continued to work. Yes, he was well paid, but he also bore heavy responsibilities, and ultimately he decided it just wasn’t worth continuing.

  14. The tax payer should not be subsidising pensions that provide more than enough to keep people from claiming benefits from the state after retirement. Tax relief should not be given to fund cruises and golf in retirement. These should be funded by ordinary savings. The lifetime allowance at £1 Million is therefore too high and should be reduced to no more than about £500000. This fundamental reason for giving the tax incentive has been lost in the debate!

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