On the go: Chancellor Rishi Sunak was reportedly planning to freeze the lifetime allowance for the rest of the current parliament, according to a report in the Times — a move that could see public sector workers hit hard.
The freeze, which could be announced in the next Budget, would see the lifetime allowance — the threshold above which pension savings are no longer subject to tax relief — capped at £1,073,100, and could penalise a range of pension savers.
This sort of fiddling with the periphery of pensions rules does nothing for the long-term nature of pension saving nor helps the chancellor balance the books. You have to wonder what the point is.
David Brooks, Broadstone
Though the freeze has been parsed by many in the industry as a 'stealth tax' on wealthier pensioners, Steven Cameron, pensions director at Aegon, said it had the potential to hit a wide variety of pension savers.
The freeze “would mean more individuals, many simply seeking to do the right thing for their retirement, exceeding [the cap] and facing a tax penalty, because of achieving good investment growth in their defined contribution pension”, he said.
He added that those building up “generous defined benefit pensions” could also be hit, as well as higher earners in the public sector who benefit from substantial DB arrangements.
“The lifetime allowance in defined benefit schemes is an annual pension amount of one twentieth of the ‘cash’ limit, or £53,655 a year. It would be interesting to see any analysis the chancellor has done over how many NHS doctors or head teachers might be hit by this change,” Cameron said.
Freeze is 'pointless', government 'making it up as they go along'
Cameron pointed out that freezing the lifetime allowance could signal that the more radical proposal for a flat rate tax relief of 25 per cent on their pension contributions is less likely to come to fruition.
This would come as good news to higher and additional rate taxpayers, as the flat rate would “reduce if not remove the need for a lifetime allowance as incentives on payments in for higher earners would be far less”, he continued.
“Overall, however, a freezing of the lifetime allowance would impact far fewer individuals and could be implemented much more quickly. A move to a flat rate of tax relief might spread tax relief more evenly across earnings bands, but would be far more complex to put in place anytime soon.”
However, the proposed freeze was criticised by Broadstone technical director David Brooks, who called it a “relatively pointless tinker”, given it is only expected to raise £250m a year, which is a pittance “considered in the context of the massive cost of furlough”.
“The current low level of inflation also limits the impact at this time. We should also be clear that the impact is on those currently saving, not those already retired. Given this government frequently road tests ideas in the press I would not be surprised if this gets shelved or is paving the way for a bigger change,” he continued.
“This sort of fiddling with the periphery of pensions rules does nothing for the long-term nature of pension saving nor helps the chancellor balance the books. You have to wonder what the point is."
LCP partner Steve Webb questioned whether all the recent changes to the lifetime allowance betrayed a lack of strategic thinking by the government.
“What people need in pension planning is certainty. But with the [lifetime allowance] we have seen the opposite. First it was slashed, from £1.8m to £1m, then frozen, then linked to inflation and now frozen again.
“It is almost as if the government doesn’t have a long-term plan but makes it up as they go along.”
Isio partner Mike Smedley said that, though the pension pots of high earners might seem an obvious target, raiding them in this way creates uncertainty as well as exposing “the disparity in the rules between DB and DC pension schemes”.
“Members of DB schemes can receive 50 per cent more pension before tax rules bite than their DC counterparts”, he said.
Move reflects fears of inflation
However, Tom Selby, senior analyst at AJ Bell, suggested that getting rid of the lifetime allowance’s inflation predictions now could reflect longer-term fears about inflation, rather than short-term considerations.
“The decision to scrap lifetime allowance inflation protection for the rest of this parliament is likely less about the modest 0.5 per cent rise in the lifetime allowance due to kick in from April this year and more about rises in subsequent years,” he said.
Govt maintains current AE tests for DB and hybrid schemes
On the go: The Department for Work and Pensions has concluded that the current tests used by defined benefit and hybrid schemes for auto-enrolment suitability are fit for purpose.
“If we see a vaccine-inspired spending boom in the UK this summer, for example, inflation could be pushed northwards — and so too would the lifetime allowance under current legislation. By freezing the lifetime allowance as inflation spikes, the chancellor will stealthily drag thousands more people into his tax net.”
He warned, however, that savers will not accept such a measure in perpetuity, and “will be looking for clarity on when the inflation link will be returned so they can continue to save for the future with confidence”.
