On 21 June 2021, media reports in the UK signalled that chancellor Rishi Sunak was setting out plans to cut the pension lifetime allowance (LTA) in his autumn budget by as much as £270,000 ($372,600, €314,000), to balance the books.
This would potentially mean dropping the LTA to around £800,000 from the current £1.07m, a threshold which many retirees would easily breach in their lifetimes.
The LTA has been subject to several reforms. In the last decade alone, it peaked at £1.8m to then be reduced time and again to its current level.
Then, in the latest spring budget, the Treasury decided to freeze the limit for five years.
But just hours after the media reports started circulating, the Treasury backtracked saying that Sunak was not “actively looking” at reducing the lifetime allowance in his upcoming budget.
Despite government and industry encouraging people to take retirement saving more seriously, pensions always seems to be among the first measures on the chopping block.
‘Death by a thousand cuts’
To understand how the issue could affect people both in terms of financial planning and attitudes towards savings, International Adviser spoke with advisers across the UK.
Tim Sargisson, chief executive of Sandringham Financial Partners, said: “Back in March, the government took the decision to freeze the sum for five years at its 2021/22 level of £1,073,100. Then, two months later we hear that maybe it won’t.
“The fact is that these constant tweaks damage confidence in pensions as a way of saving for retirement. A case of ‘death by a thousand cuts’ at a time when the need to save towards retirement is increasing, especially as more and more defined benefit schemes close.
“Trust in this form of financial planning is being impacted and people will not have faith in a system where the goal posts keep moving all the time.”
Sarah Lord, president of the Personal Finance Society, agrees with Sargisson in the sense that all these changes, even if announced but then not implemented, do no favour to consumers.
“In recent years the lifetime allowance has reduced significantly and thereby the number of individuals caught by it has grown substantially, reducing it further would mean that more individuals would be required to pay tax on their pensions savings,” she said.
“It is already at a level which means that many need to plan around the lifetime allowance and further change is likely to exacerbate the issue. A reduction from the current level would also potentially discourage more from saving into a pension for their future retirement which is the opposite to what the current and previous governments have been wanting individuals to do – they want individuals to save for their retirement.
“Furthermore, it would be interesting to see exactly how much the government believes a cut in the lifetime allowance would generate as I suspect relative to the overall amount they need to find to help the public finances it is a very small percentage.”
But David White, managing director of QB Partners, cautioned that, if the government keeps tinkering with the tax system, it risks making pensions “a less efficient way of saving”, and all the efforts put towards encouraging people to put more aside could just vanish.
“A cut of this magnitude to the LTA would have a significant impact on a major proportion of UK pension scheme members,” he said. “For example, a retirement fund of £800,000 may only provide an income of £30,000 per annum for a 60-year-old male, after a pension commencement lump sum has been taken.
“For many, this would be a drop in income over their earnings in employment. Whilst pension scheme members can accrue a fund in excess of the LTA, the excess over the LTA will incur lifetime allowance charges at the first benefit crystallisation event of 25% of the excess, if the benefits are used to provide an income, or 55% if used to provide a lump sum, which will actively discourage people from using pensions to save for retirement.
“The changes will not only have an impact upon people with a current pension fund in excess of £800,000. Younger scheme members with lower values who have some time left before they start to take benefits are likely to find that the impact of further contributions and investment growth may mean that they are having to take the lifetime allowance into consideration.
“For example, a pension scheme member aged 40 with a scheme valued at £400,000 may have a fund in excess of the proposed lifetime allowance limit by the time they reach minimum pension age (55), even without further contributions, with average investment returns.
“Although younger scheme members have time to make alternative plans for their retirement, if pensions become a less efficient way of saving, the people who will be most impacted will be those approaching retirement, who already have a pension scheme valued close to or in excess of the lifetime allowance. Hopefully, as they have in the past, the government will allow people to ‘protect’ their LTA at current, pre-change levels.”
In the past, White added, clients were able to mitigate the LTA charges by using a Qrops, but this is not the case anymore, “following the introduction of the Overseas Transfer Charge and is likely to reduce further following the planned Department of Work and Pensions changes being introduced in the Autumn, which will require a UK ceding scheme to check that the member is residing in the same jurisdiction as the Qrops to which they wish to transfer their benefits”.