The Government should keep its hands off our pensions!
Comments Off on The Government should keep its hands off our pensions!The Government should remove the £1m lifetime allowance and keep it’s hands off our Pensions!
Changes in pensions legislation have had more impact than anything else I have experienced as a financial planner. The most significant development was the sweeping changes to pensions announced in the Labour government’s 2004 budget, which came into effect on 6 April 2006 and became known as “pensions simplification”.
The aim was to encourage retirement planning by simplifying the previous eight tax regimes into one single regime for all individual and occupational pensions.
‘A foolish piece of legislation’
One of the most important changes (and one which many people thought would not affect them) was the introduction for the first time of a £1.5m “lifetime allowance”. It meant that all personal and occupational pension benefits that exceeded this limit would be hit with a 55 per cent tax charge.
Since 2010, successive governments, in their attempts to tighten the Treasury’s coffers, have reduced the lifetime allowance to its current cap of £1m.
Protections have been put into place for investors with funds that transition these limits but, 11 years since its introduction, an allowance which originally affected only a small proportion of retirees is now affecting many.
Since the introduction of the lifetime allowance in 2006, the FTSE All-Share index is up 91 per cent, so anyone with a little more than £500,000 in a pension then may now be experiencing its impact.
The lifetime allowance is, in my opinion, a foolish piece of legislation which only penalises those who are sensible and have made good provision for their retirement. It is a penalty on the prudent.
There seems little benefit to anyone – other than the Treasury – of the lifetime allowance, particularly since the introduction of the annual allowance (a £40,000 cap on annual pension contributions).
One hopes that in the fullness of time it will be removed, but let’s not hold our breath.
Double standards depending on the type of pension
A 65-year-old retiring with a £1m personal pension fund can purchase an annuity in today’s market of £32,000 per year indexing with inflation, or £28,000 a year when you include a 50 per cent spouse’s pension for someone the same age.
Their defined-benefits counterparts, on the other hand, would need a pension of £50,000 per year to hit the £1m mark, with the 20-times multiplier to calculate their equivalent lifetime allowance value.
This is particularly unfair when cash-equivalent transfer values are obtained from defined benefits schemes and the cash value is far higher than the 20-times multiple. The cash values being offered can often be as high as 40 times, effectively doubling the lifetime allowance.
It is a clear two-tier system.
Tax-deferred, not tax-free
When planning for your retirement, you need to consider government intervention as a risk. New policies have affected pensions numerous times over the years, most notably through the equalisation of male and female state retirement ages, the increasing of the state retirement age, and the increase of the minimum retirement age for personal pensions.
With the UK running a £69bn annual deficit and the country’s debt at about £1.6trn and rising, ask yourself this: if the Government wanted to slow down this debt growth, how might it do it?
One answer is to increase taxation. So, while today, you might receive 20 per cent or 40 per cent or 45 per cent tax relief, you may find the taxation of your pension is higher during your long retirement in the future.
Pensions are tax-deferred retirement schemes, not tax-free. A healthy balance between ISAs and pensions tends to be the only safe conclusion.
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