With the government mulling over further tax cuts in the wake of last week’s ‘mini Budget’, there have been suggestions that the pensions lifetime allowance will be reviewed amid concerns it may be forcing people to retire early.
The current lifetime allowance stands at £1,073,100 and is set to stay at this level until 2025/26, following previous Chancellor Rishi Sunak’s announcement that tax thresholds would be frozen for five years.
However, critics point out the decision to freeze the lifetime allowance will drag more people into its clutches and follows years of persistent cuts to the allowance from a high of £1.8 million in 2011/12. They are calling for the allowance to be increased or scrapped altogether.
Jenny Holt, managing director for customer savings and investments at Standard Life, said: “Last Spring’s Budget saw the lifetime allowance frozen until 2026, however, since then inflation has spiralled to double digits meaning that the real value of what people can save in their pension without incurring tax charges has fallen significantly.
“While £1.073 million represents a substantial pension pot, the freeze means middle and higher earners who have saved diligently can be caught out, often as a result of good investment performance.
“With those approaching retirement seeing costs rise, many will be looking to ensure they are adequately prepared for the type of retirement they’d envisaged but the reality is, the real value of what they’re able to save tax efficiently into a pension is being cut. As a result, we would support a removal of the freeze and would like to see lifetime allowance increase at least in line with inflation.”
The sentiment was echoed by Tom Selby, head of retirement policy at AJ Bell, who noted that the lifetime allowance is at the heart of the current NHS crisis, with thousands of staff forced to retire early or risk being hit with a punitive tax bill for breaching the allowance.
Selby said: “While the Treasury has proposed a specific solution for the NHS scheme, the lifetime allowance also presents wider challenges. In defined contribution schemes, the lifetime allowance risks punishing those who take investment risk and enjoy long-term growth as a result of taking that risk. This investment disincentive runs counter to this Government’s clearly stated focus on boosting economic growth.”
The freeze also caps people’s retirement standards at around 60% of the level previously seen in 2011, without taking into account the effects of inflation and earnings growth.
Selby added: “The lifetime allowance makes the pension tax rules unnecessarily complicated, adding to an already confusing picture. If we want people to save more for retirement, we need to make the rules as simple as possible. There are different ways you could do this. Increasing the lifetime allowance would clearly help but there is an argument for scrapping it altogether and controlling pension tax costs with a single annual allowance.
“This would leave people freer to invest their pension in assets which match their appetite for risk, rather than being distracted by the impact a lifetime allowance tax charge might have. It would also help the Government make good on its aim to simplify the tax system.”
