Pensions lifetime limit cut to £1m from next year. Experts condemn ‘cap on aspiration’ in pensions

18th March 2015

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The Chancellor of the Exchequer George Osborne is to cut the amount you can save in a pension in a lifetime to £1m before risking a 55% tax charge.

From next year, the amount of the lifetime limit will be cut from £1.25m to £1m. The Government has therefore embraced one of the Labour opposition’s policy proposals. The limit is to be indexed with inflation from 2018.

The move is expected to save around £600m a year. The Treasury says that the move will affect just 4% of current pension investors.

However one financial adviser has attacked the move as a cap on aspiration. Adviser De Vere says the move will also act as a catalyst for better off investors to move their pensions out of the UK.

Pre-election gimmick

Chief executive of deVere Group, Nigel Green, says: “Another reduction in the lifetime allowance is scandalously counter-productive. This pre-election gimmick is a disincentive to save as much as possible for retirement– and therefore it could be harmful to Britain’s long-term economic success.

“With the burgeoning pensions crisis and the looming care crisis, amongst many other factors, we need to urgently revitalise, promote and nurture a savings culture in the UK as a matter of priority.  Continually cutting the LTA goes against this concept.”

“This move is a slap in the face for those who have worked hard and saved hard, prudently putting money aside all their lives, in order to be able to enjoy their desired retirement.  It is a nothing short of a dangerous cap on aspiration.”

Morten Nilsson, CEO of NOW: Pensions says: “Reducing the lifetime allowance will only impact a tiny percentage of pension savers. But, if the government’s long term goal is to encourage people to save a greater proportion of their salaries into pensions, there is a risk of a mixed message – save for the future, but not too much.

“Increasingly, pension reform is being used as a party political tool. While many of the recent changes are welcome and long overdue, pension policymaking should be based on long term objectives and built on consensus – not short term gain. This is why we believe that an independent pension commission could play a crucial role in scrutinising how these reforms impact one another.”

40 year old with £250,000 already saved and a generous pension scheme could breach limit by 65

Ian Gutteridge, director of pension advisory firm Premier says that the change will hit anyone on course for a pension of more than £50,000 a year.

He adds: “A clever political move? Who’s going to feel sorry for someone on course for a pension in excess of £50,000? Not exactly a vote loser! In the past we had “stealth” tax designed to hit people when they didn’t see it coming.

“Now we have ‘precision bombing’ tax that targets those who are sensible enough to save for retirement at an early age. A 40 year old with just over £250,000 of pension savings growing at 5% pa, receiving a 10% annual contribution and salary growth of 3% each year will hit the limit by the time they are 65 years old. We hope HM Treasury build some future inflation proofing into the LTA, but based on the recent past performance don’t bank on it. It has gone down by 45% since April 2012!”.

£1 million pot would buy a couple around a £27,000 joint life pension

Malcolm McLean, senior consultant with pension advisers Barnett Waddingham says that when the million is used to provide an income for a couple that translates into a pension of £27,000.

He says: “From a pension point of view it is very disappointing that the chancellor has seen fit to implement a (further) reduction in the LTA from £1.25m to £1m from next year (albeit from 2018 it will be index linked). Frankly this is unfair, unnecessary and unwise.

“Although a million pounds still appears to be and is a very large sum of money, which clearly is beyond the aspirations of the average pension saver, it does mean that for a defined contribution pension pot it actually only produces an annual pension of little more than £27,000 (inflation proofed and providing for a spouse).

“In many respects the concept of having a lifetime limit is outdated and unnecessary, now that the annual allowance has been reduced to £40,000 and is the effective controlling mechanism for limiting tax relief on pension saving. The existence of the LTA and the regular monitoring against it overly complicates pension saving at a time when strenuous efforts are being made through automatic enrolment and other measures to encourage saving into a private pension.

Will it drive QROPS sales?

Nigel Green says he expects the LTA changes to drive an increasing number of pension savers to look for alternatives.

The ongoing cuts in the lifetime allowance will, I believe, serve as a catalyst for people to move their British pensions out of the UK and into an HMRC-recognised QROPS, an overseas pension in a secure, low-tax jurisdiction.

“When a UK pension is transferred into a QROPS, it is tested against the LTA at that time of transference. When the pension pot is outside the UK, it will be exempt from the LTA limit – even if the pension pot increases beyond £1m over time.  This is significant as the LTA could be cut further in the future.Similarly, those who transfer their pensions into a QROPS will typically benefit from being able to access flexible high-return investments and have their pensions paid in the currency of their choice, amongst other advantages.”

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