20th March 2013
The Government has underestimated the number of people caught by cuts to the pensions lifetime savings limit confirmed in today’s Budget, pension experts have warned. It also sets up an unfair playing field between those receiving a big public sector pension such as MPs and senior civil servants and those in the private sector.
Skandia says it is disappointed by the Chancellor’s confirmation today that the Lifetime Allowance will fall to £1.25 million from the 2014/15 tax year as announced in the Autumn Statement. The firm wants the lifetime limit scrapped altogether.
The Government released figures showing it expects 360,000 people to be impacted by the reduction in LTA in the future, figures which Skandia believes could potentially be underestimated.
For example, the firm argues that the figures are unlikely to take account of new savers starting their pension today, making modest contributions, who could be at risk of breaching the LTA limit. Analysis from Skandia shows that someone aged 25, starting to invest in a pension with the intention of retiring at age 65, will have 40 years of potential pension contributions. If they invest £427 gross each month into their pension, or just £256.20 net for a higher rate tax payer, their pension savings could reach the £1.25m LTA by the time they intend to retire. (This assumes 3 per cent a year growth in contributions and 7 per cent annual investment growth).
Adrian Walker, Skandia’s pension expert, says: “The decision to continue with the reduction in the Lifetime Allowance is a worrying trend. Ideally it should be scrapped as it penalises good investment performance, but at the very least the limit should be rising to take account of inflation. It is simply not good enough to continually penalise ordinary hardworking people who are prudent enough to save for their future. It is not just the wealthy being impacted here, and we would question the Government’s analysis. Our figures show that people making relatively modest levels of regular savings into a pension could be impacted in the future, limiting the incentive for people to save for their long term retirement income needs using a pension.”
Patrick King, tax partner at MHA MacIntyre Hudson, says this will lead to a very unlevel playing field between public and private sector employees.
He says: The swingeing cuts in Britain’s private sector pensions, announced in the Autumn – a reduction in the lifetime limit from £1.5m to £1.25m effective from 05.04.2014, and the annual allowance, from £50,000 to £40,000 from the same date – have been confirmed in today’s Budget. The Chancellor justified this reduction at the time of the Autumn Statement by claiming 98 per cent of the population does not save this much and that everyone must pay a fair share”.
“However at current annuity rates a pension pot of £1.25m would buy an index linked pension similar to those available to the public sector of around £32,000. If a lump sum was taken this would reduce to around £24,000. An MP or Minister or other senior civil servant would receive an index linked pension of up to £62,500 before any excess pension fund charge – nearly twice that of the private sector working with these new limits. Such public sector workers could, in some circumstances, also receive a lump sum on top of these amounts. Will we see adjustments to public sector pensions to ensure fairness and affordability to the taxpayer?”