Industry figures have lambasted the government’s decision to reduce the lifetime allowance (LTA) for pensions from £1.25m to £1m from next year.
Chancellor George Osborne (pictured) announced the change in today’s Budget statement after describing the current maximum level people can save in a pension tax-free as “unsustainable”.
He said the gross cost of tax relief had risen through this parliament to almost £4bn.
“That is unsustainable,” he said. “So from next year we will further reduce the lifetime allowance from £1.25m to £1m.”
He added cutting the LTA would net the Treasury around £600m a year and would affect only 4% of pension savers approaching retirement.
Osborne said the government wanted to protect those still building up pension pots from inflation and so announced from 2018 the LTA would be index-linked.
The government also decided against reducing the annual allowance on pension savings because it would involve “penalising moderately paid, long serving public servants including police officers, teachers and nurses and instead rewarding higher paid graduates”.
Osborne added: “Such as policy would be neither be progressive or fair and we won’t do it.”
Barnett Waddingham consultant Malcolm McLean said reducing the LTA was “unfair, unnecessary and unwise”.
He added: “Although a million pounds still appears to be and is a very large sum of money, which clearly is beyond the aspirations of the average pension saver, it does mean that for a defined contribution pension pot it actually only produces an annual pension of little more than £27,000 (inflation proofed and providing for a spouse).
“In my view the lifetime allowance is superfluous and unfair in that it not only restricts the level of tax relief that can be given but also imposes a 55% surcharge on those who perhaps through prudent management of their money and by securing good investment returns have unwittingly exceeded the limit.
“Perhaps the time has now come or at least it is fast approaching where the lifetime allowance should be scrapped, an added bonus being that it would deprive politicians of the opportunity to tinker with it further for no good reason other than as political tactic.”
Elsewhere, Now: Pensions CEO Morten Nilsson said cutting the lifetime allowance sent a mixed message to savers.
He added: “Reducing the lifetime allowance will only impact a tiny percentage of pension savers. But, if the government’s long term goal is to encourage people to save a greater proportion of their salaries into pensions, there is a risk of a mixed message – save for the future, but not too much.”
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