View more on these topics

John Lawson: Why it is time to scrap the lifetime allowance


The factors used in pension tax law to measure defined benefit pensions have become increasingly outdated since the 2006 simplification project. Arguably, the factors used at that time to convert DB into cash amounts for measurement against the annual and lifetime allowances were generous to members. Today, there can be no argument that defined contribution savers get a comparatively rough deal.

A £50,000 a year CPI-linked pension for a 60-year-old with a 50 per cent partner’s pension would cost about £2.4m to buy on the open annuity market. That cost is strangely all within the lifetime allowance if the trustees of a DB scheme buy the annuity. If, however, an individual DC saver buys the annuity then the pension produced by £1.4m of their £2.4m fund is subject to an extra tax charge of 25 per cent.

Put another way, the £1m lifetime allowance is only enough to buy a CPI-linked income with a 50 per cent partner’s pension for a 60-year-old of just over £20,000 a year. Compare that to the £50,000 annual income a DB scheme can provide without a lifetime allowance charge.

A £20,000 pension equates to two-thirds of a pension for someone with a final salary of just £30,000. So, in thinking about DC members and the £1m lifetime allowance, we are not talking about the mega-rich anymore.

This situation has mainly arisen out of the increasing cost of promising a fixed lifetime income. The bonds used to back these promises are trading at all time highs. And there is no sign of these pressures abating any time soon.

Excess demand created by government bond buying programmes, investor flight to safety, DB liability matching and extremely low central bank interest rates are all conspiring to drive bond yields ever lower.

Those forces are also driving DB transfer values to record levels but, at the same time, the lifetime allowance encourages members to stay in those schemes, even if the new flexible options available in DC schemes are a better solution. So much for freedom and choice.

Such artificial barriers should not exist. The system should not prevent the free flow of savers from one type of pension to another if they think it better meets their needs. Nor should they prevent the free flow of capital to assets such as equities, which are usually preferred by DC savers.

The lifetime allowance encourages a conservative approach to DC investment choice because there is no point taking excess risk in the knowledge a 25 per cent tax charge applies to the reward in addition to your highest marginal tax rate. For a higher rate taxpayer, the combined tax charge is 55 per cent. Why bother taking risk when 55 per cent of the reward goes to someone else?

This favouritism in the pension tax rules towards DB schemes and their members should stop. Three-quarters of the £34bn in gross pension tax relief is consumed by DB schemes, despite their active members now making up roughly 20 per cent of the working population. Why is it that so much of our tax relief is enjoyed by so few?

There might be an argument for favouring these workers if wealth were being redistributed. But that is not the case. Median weekly earnings in the public sector, where roughly five out of six DB members work, are £589 compared to £501 in the private sector where DC schemes dominate.

Some DB tax relief applies to deficit recovery contributions making up for the underfunding of past accruals, but most of it is incurred in respect of new accruals for active members or paying pensions to members of pay-as-you-go schemes.

The result is that DB scheme members have it all ways. Most of the tax relief on the way in and less of the lifetime allowance charge on the way out. The lifetime allowance is preventing people using their pension in a way that suits them best. It is discouraging risk taking. What is more, it is rewarding a very small part of the workforce that already enjoys most of the tax relief. It is time it was scrapped.

John Lawson is head of financial research at Aviva



Govt banks £350m in lifetime allowance charges

The Government has collected £353m in tax charges paid by people breaking the lifetime allowance limit, leading to renewed calls to scrap the penalty. A freedom of information request submitted to HMRC by AJ Bell, and seen by Money Marketing, reveals £352,888,336 has been paid between 2006/7 and 2014/15. The annual take from the measure […]


FoI reveals surge in Govt lifetime allowance tax take

Revenues from breaches of the lifetime allowance on pension contributions rose more than three-fold during the last Parliament, official figures reveal. Figures published following a Freedom of Information request by Suffolk Life show HM Revenue & Customs took in £94.2m in tax as a result of contributions to pots in excess of the allowance in […]


Lifetime allowance cut could see family pensions targeted

The Government’s plans to limit the lifetime allowance on pension contributions could lead to a crackdown on family pension schemes, experts predict. Proposals to lower the lifetime allowance from £1.25m to £1m were revealed in the last Coalition budget and are due to take effect in April 2016. The Conservatives also want to taper the […]

Inheritance tax when it is relevant

Neil Jones is Technical Support Manager with Canada Life’s ican Technical Services Team. Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland. A trust can offer significant advantages when an individual is […]


News and expert analysis straight to your inbox

Sign up


There are 4 comments at the moment, we would love to hear your opinion too.

  1. “Why bother taking risk when 55 per cent of the reward goes to someone else?” Well, mainly because it doesn’t make sense to turn up one’s nose at the residual, additional 45% that you get to keep. 45% of growth is surely better than 100% of no growth? However, totally agree with the thrust of the piece. It is particularly wrong to limit outputs for those with no pre 6/4/2006 benefits who have also had their inputs limited. I might have some sympathy for a limit on accrual where some of that accrual occurred before the input limits came into being on 6/4/2006.

  2. This has been the way for years, since annuity rates collapsed. Presumably Civil Servants and MPs are looking at this and will change the rules to bring DB scheme benefits down to equate more fairly with those of DC schemes – Oh wait a minute, who are those most likely to always be in DB schemes?…..

    The other scandal is the Annual allowance limit, which massively favours the salaried over the self employed and small business owners. Civil Servants again?

  3. It also seems anomalous that taking Fixed Protection offers relief from excess tax charge on £1m+ funds by preventing further contributions – but does not protect future investment growth on the fund. Abolition of LTA might be excessively in favour of high earners – but taxing investment growth at 55% seems harsh (and yes, I accept that growth arises in a tax-favourable environment).

  4. This is what happens, when you have a bloated public sector, run by bureaucrats, with the permission of elected representatives and when all of the above are beneficiaries of these advantageous rules.

    Of course they let it happen, it’s in all of theirs personal interests and they aren’t the ones that pay for it.

    Very much like our insane housing market, including BTL, do we think that nearly all MP’s owning BTL properties might have something to do with it?

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm