Lifetime allowance - where next?

The longer I am in this industry, the more I can celebrate the anniversaries of significant pension events. 2016 is no exception – 10 years since the introduction of pension simplification and A-Day.

The consultation document ‘Simplifying the taxation of pensions: increasing choice and flexibility for all’ was published in December 2002.

It came with some very ambitious objectives, in the end perhaps proving too ambitious!

Let’s have a quick look at the stated aims of the consultation:

“…but for too many people, pension planning has been an incomprehensible maze ... In particular, the complexity of the current tax rules have made pensions hard to understand even for experts.”

“There are currently no fewer than eight different sets of tax rules in use for pensions, imposing unnecessary inflexibility, driving up costs, and – worst of all – discouraging people from saving.”

“...the Government is setting out proposals for a radical simplification of the tax rules for pensions, ... A single lifetime limit on the amount of pension saving that can benefit from tax relief.”

“These proposals for radical simplification will enable people to make clear and more confident decisions about pension saving. They will mean far greater individual choice and flexibility about when and how much to save in a pension.”

Ten years later you would have to be in possession of extremely rose-tinted glasses to call any of this a success.

At the same time we had proposals for pensions to be able to invest in all sorts of ‘esoteric investments’, with residential property both in the UK and overseas being top of the investor wish list.

This change never actually happened – a Gordon Brown U-turn prevented the change and in retrospect, with the economic conditions that followed, this was probably just as well!

We finally got there in April 2006, with a couple of new concepts; a maximum tax relievable fund – the lifetime allowance (LTA), and a maximum annual contribution – the annual allowance (AA).

To start with, and after much consultation, the LTA was set at £1.5 million and the AA £215,000 p.a., with prescribed increases allowing them to reach a peak of £1.8 million and £255,000 respectively in 2010/11. Along with this came the first protection regimes – Primary and Enhanced to protect what had already accrued.

After the LTA peaked at £1.8million, it then fell – now being £1 million from April 2016. The AA fell from the very generous £255,000 to the current figure of £40,000 p.a.

So, the LTA (after initial increases) has been reduced three times, resulting in five additional protection regimes plus the original two.

The LTA has been roundly criticised – why do you need an overall fund limit when you have an annual one – does this just make it a tax on investment performance?

The problems of the LTA raised their head again when the Pensions Minister Baroness Altman confirmed her dislike of the concept reiterating her previous call to have it abolished.

I do not see the discussions of the change to pensions tax relief going away. Perhaps delayed for this Budget due to external issues, I am sure that it will return on the agenda in the Chancellor’s Autumn Statement and the existence and level of the LTA will be part of that decision-making process.

I do not think it beyond the realms of possibility that a reduction in pension tax relief is offset by the removal of the LTA.

From my many discussions with advisers, the LTA is really preventing long-term pension funding. How do you tell an individual with a mid-range fund value that (assuming a particular growth rate) he or she should stop funding?

A fund of £780,000 today will breach the LTA in 10 years' time if it achieves a real rate of return of 2.5%. But who knows how much income that £1m will buy at retirement – annuity rates do not look like they are likely to increase.

Head of Platform Technical

Mike Morrison has worked in financial services for far too many years. In 1990 he joined Winterthur (now AXAWealth) as Technical Manager, playing an instrumental role in the development of their SIPP product and later their pioneering work on income drawdown.

Mike is an ex Chairman of AMPS (the Association of Member Directed Pension Schemes) and is on the Financial Planning Committee of the ICAEW. He is also an Associate of the Pensions Management Institute and the Chartered Insurance Institute, and he holds both an LLB and an LLM in European Law.

An accomplished speaker and writer on financial services matters, Mike is passionate about retirement and savings issues, and how we can better communicate these to a wider audience.

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