27th February 2015
Labour leader Ed Miliband has confirmed he plans to cut the lifetime and annual pension allowances to fund a tuition fee reduction if elected.
Rumours were circulating this morning about the measures Labour would take to reduce the benefits of saving into a pension. The party has already confirmed plans to restrict pension tax relief to 20% for those earning £150,000 or more a year to pay for a jobs guarantee.
Now it has said it will reduce the annual pension contribution allowance from £40,000 to £30,000 and the lifetime allowance from £1.25 million to £1 million.
Tom McPhail, head of pension research at Hargreaves Lansdown, said the measures will hit the middle classes rather than the rich.
‘The measures aren’t about targeting the super-rich, they would penalise responsible middle income workers who want to provide for their retirement and make sure they aren’t a burden on the state,’ he said.
‘Politicians have come to see our retirement savings as a convenient piggy bank which can be raised to pay for pre-election promises. We are also concerned that the full effects of auto-enrolment and the new pension freedoms are not yet known, introducing further radical change to tax breaks now increases the risk of unintended consequences.’
McPhail said restricting the lifetime allowance to £1 million would mean a 65-year-old looking to buy a secure inflation-linked income for themselves and their spouse would be restricted to a maximum income of £27,000 a year – based on current annuity rate.
‘It is worth noting that this applies to money purchase pensions; final salary scheme members would still be able to build up a secure pension of up to £50,000 a year,’ he said.
‘Every time the lifetime allowance is reduced we get more middle to high earners in final salary schemes looking to opt out.’
He added that reducing the lifetime allowance to £1 million also makes the annual allowance redundant.
‘Someone starting a pension at age 40, paying the maximum annual allowance of £30,000 a year wouldn’t even be able to reach the lifetime allowance anymore; their projected pension fund at age 67 would be only just over £900,000, even after 27 years of saving,’ said McPhail.