Lifetime allowance freeze reopens debate on its relevance

No assault on pensions tax relief to reduce savers’ tax relief bill. Nothing on the net pay anomaly that the Treasury began looking at over the summer. Nothing on the irritation that is the money purchase annual allowance, and they did not heed the calls to leave the Lifetime Isa alone.

The key pension announcement was the freezing of the lifetime allowance. Some may react with a sigh that it is lucky it was only this. However, this issue triggers a number of different reactions.

Little sympathy for high savers

This new freeze has prompted questions, once again, as to what the purpose of the LTA is, other than a tool to cap public sector pension spend and to discourage people to save in the first place

One view is that amassing benefits above the LTA should illicit little sympathy. People that have been able to save £1m, or have a pension valued at more than £1m, will generally be all right. And in a time when there is a collective battle to pay off our debts, everyone should do their bit.

This view suffers from a couple of flaws — £1.073m sounds a lot, it is a lot, but in the spirit of Dr Evil from Austin Powers, “it isn’t the same as what it used to be”.

Without opening a debate on the adequacy of pension provision, we have to consider how we have arrived at this number. The short answer is arbitrarily.

Various governments over a 15-year period have determined that wildly different amounts have been worthy of tax-efficient status. The initial LTA was not directly index-linked from April 2006, but if it had been it would be worth around £2.2m now.

This new freeze has prompted questions, once again, as to what the purpose of the LTA is, other than a tool to cap public sector pension spend and to discourage people to save in the first place, and thereby cause a reduction to the tax relief bill. Cash now for the exchequer is clearly a key driver in this latest change.

We should also acknowledge the ‘stealth’ part of the LTA freeze — it is stealthy as it has a termite effect in its impact.

Given the government’s need to inflate away some of our debt, it is likely that a period of inflation is coming. The gap between what the LTA is, and what it would otherwise have been, will grow.

Also, where inflation and investment markets settle at the end of this parliament will determine the true impact of the LTA over the longer term.

One more consultation on pensions and illiquid investments

In addition to the LTA hit, the chancellor also turned his attention to one of the government’s favourite topics of recent times: “How to make use of all the pension money sitting around doing things other than what the government would like it to do? How can pension schemes be encouraged to invest in more complex and illiquid asset classes?”

The largest pension schemes, like Nest, have been attempting to address this issue, but barriers remain to its wider adoption. The infrastructure investments consultation will need to wrestle with how performance fees can be efficiently smoothed over a longer period in order that they fit within the charge cap.

Care will need to be taken with regard to liquidity and stakeholders’ desire to have frequent and accurate fund values.

However, these issues are not insurmountable and have been addressed by Nest, which is already operating in illiquid markets. We should also look to Australia, where the country has incorporated large allocations to illiquid assets.

The barrier may end up being regulatory, with only the trust-based schemes able to fully embrace this at present due to the need to have daily dealing. The challenge may become the sheer number of trust-based defined contribution schemes, many of which are small and inefficient and unable to tap into the required level of complexity.

We know the government is working towards a wider consolidation. It is likely that the true success of this infrastructure initiative, which is widely supported across the industry, will depend on the Pensions Regulator’s ability to improve and consolidate the trust-based pensions space.

David Brooks is a technical director at Broadstone