View more on these topics

Time to stop the salami slicing on tax relief

Steve Webb  – Director of Policy and External Communications

As the Autumn Statement approaches, Steve Webb calls for the Government to stop tinkering with tax relief.

Twice a year, in the run-up to the Spring Budget and the Autumn Statement, we face a torrent of speculation as to what changes the Chancellor might make to pension tax relief.

Although pensions should surely be a long-term business, the constant tinkering with the rules around tax relief make long-term planning increasingly challenging. The lifetime allowance has been cut three times in the last five years whilst the annual allowance has been reduced and subjected to a 'tapering' system of mind-numbing complexity.

Although each change can be justified in isolation, the combined effect of this repeated 'salami-slicing' is a huge cut in the kind of pensions that can now be bought without breaching tax relief limits.

To get a sense of the scale of these changes, we have published a new Royal London Policy Paper – Pensions Tax Relief – Time to Stop the Salami Slicing. In it we look at the combined effect of the falling LTA and the falling annuity rates that we have seen over the last decade.

The report shows that a pension pot worth the current maximum of £1m could buy an annuity of around £45,000 at age 65. This a fall of around two-thirds in the last decade as falling tax limits and falling annuity rates combine to cut the pension you can buy. This is a huge restriction on the standard of living that people can secure through pension saving.


Indeed, for those who want a 'gold standard' annuity with full RPI protection, a good pension for a surviving spouse and guarantees in the early years, they would struggle to get a starting pension of much more than £21,000 without breaching tax relief limits.

Of course, not many people would take a £1m pension pot and use it to buy an annuity. But the factors that have led to falling annuity rates – principally increasingly longevity and lower interest rates – also mean that the standard of living available from a £1m pot invested in drawdown has also fallen considerably.

Our view is that the LTA should ideally be scrapped altogether. It would be one thing to argue for a sensible (and simple) annual limit on the amount of tax relieved contributions you can put in to a pension, but it is very hard to see why there should be a limit on the total amount you can build up in a pension pot.

The very fact that nearly 100,000 people have now applied for one the various forms of individual or fixed protection available to those affected by these changes shows that this is no longer an issue just for the super-rich. And if the planned policy of linking the LTA only to CPI inflation from 2018 onwards goes ahead then more and more people will be at risk of exceeding the LTA.

If the LTA cannot be abolished entirely (which is probably unlikely in the present climate) we should hope that the Chancellor will resist the temptation to go for further salami slicing of tax relief in his Autumn Statement.

“The best thing he could do would be to stand up in Parliament and announce that he is keeping his party's pre-election pledge to make no further changes to pension tax relief during the lifetime of this Parliament.”

If he did so, we could all get on with the day job of designing and delivering high quality pensions and helping clients to make the best choices, rather than having to respond to the latest short-term change to the pension tax relief regime.



Analysts predict ‘weak’ day for European providers

Analysts at investment firm Keefe, Bruyette & Woods are predicting European insurers will have a weak day following the result of the US Presidential Election. After Republican candidate Donald Trump was confirmed as winning the election today, Prudential, Zurich and Aegon have been named among insurers that are expected to be impacted by movements in the […]


Chris Gilchrist: ETFs could be next for a meltdown

Exchange-traded funds are a likely candidate for the next systemic financial crisis. While most bond fund managers cannot see why interest rates will rise, a major sell-off in bond ETFs would send all interest rates up. The problem is that, while ETFs have delivered low costs, they cannot deliver on other aspects of their promises […]


Aegon eyes platform revenue boost after passing £10bn in assets

Aegon has said it is planning to drum up more business from platform fees and move away from insurance products as assets on its platform passed £10bn in the third quarter of 2016. The provider’s results today show that Aegon moved €1.5bn (£1.32bn) of client assets from its backbook onto its platform between July and […]

Tenet’s Mike O’Brien takes on regulatory director role

Tenet group brands director Mike O’Brien is taking on the role of group regulatory director after Gill Davidson leaves the business next month. O’Brien joined Tenet in 2009 as RDR programme director. He says: “Mifid II, the Financial Advice Market Review, Brexit and the consolidation of guidance services are but a few of the major […]

The Downsizing Delusion: Why relying exclusively on your home to fund your retirement may end in tears

By Steve Webb, director of policy The British obsession with homeownership can have dangerous consequences. A recent survey by Barings¹ found that up to three million people of working age were planning to rely wholly on the value of their home to fund their retirement. We are not talking about people investing in buy-to-let or […]


News and expert analysis straight to your inbox

Sign up


    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