There was a time when, on a change of government, there was an unwritten rule the incoming party would not reverse the legislation introduced by the previous one. In addition, the concept of retrospective legislation did not exist. This was considered fair and reasonable, especially because it allowed individuals to plan their lives in accordance with the laws of the day without expecting wholesale changes that were unforeseen and unplanned.
This all changed in 1997 when Gordon Brown introduced the tax bombshell to pensions by disallowing the reclaiming of tax credits on dividends. In one fell swoop, this robbed pension investors of £5bn a year. It was the government’s first stealth tax on pensions. It was also the first time we had witnessed retrospective legislation. Since then this tax raid now costs pensioners £10bn a year.
Labour introduced the lifetime allowance in 2006 to punish the fat cats, the original plan being to increase the limit every year. It reached a peak of £1.8m in 2011/12 but has since reduced to £1.25m. From 6 April 2016 it will be reduced to £1m. This now means ordinary people who have made sacrifices, worked for many years and voluntarily paid more into their pensions will increasingly be hit by this retrospective tax charge.
Interestingly, many people with final salary pension schemes will get caught out by these new rules because they will be blissfully unaware of how valuable their pensions are. Take an individual with a final salary pension of, say, £40,000 and a tax-free cash lump sum of £120,000. For LTA purposes, the pension is valued at £920,000. If that person also has a personal pension of, say, £150,000 he/she will be caught under the new limit from 6 April 2016.
I consider this to be a Venus flytrap. You get lured into paying into a pension because of the wonderful tax benefits and then once you have built a sizeable fund you get clobbered for more tax. The Government knows just how much is invested in UK pension schemes and it is truly a soft target.
Interestingly, judges, senior civil servants and MPs are exempt from the LTA. Clearly, it is one rule for them and one rule for us. This is the type of policy you expect from a dictatorship rather than a supposedly democratic government. I think it is truly shameful behavior.
I have never understood why you need a LTA anyway when you already have a contribution limit. You should have one or the other. You certainly should not be penalised for paying a lot of money into your pension and managing it skillfully.
Clearly pensions simplification has become pensions complication again. What is more I can see the next pensions misselling scandal on the horizon once people can access their money purchase pensions in full from next month.
It is my view the Government will face a huge backlash in the future once people realise what a hash they have made of our pensions.
Tony Byrne is financial planning director at Wealth And Tax Management