Lack of joined-up thinking on pensions allowances spotlighted

17 October 2019

The new triple lock figure serves to illustrate a lack of joined-up thinking on pensions allowances, according to industry commentators.

UK inflation grew by 1.7% in September, meaning pensioners are now set to receive a 4% increase in their state pension from next April, matching the rise in average earnings, as a result of the triple lock agreement.

Introduced in 2011, the triple lock guarantees that the state pension will rise by a minimum of 2.5%, the rate of inflation or the average earnings growth, depending on which is largest. It was designed to prevent pensioners from lagging behind the working age population in terms of their state pension purchasing power.

As a result of earnings growth reaching 4% in the year to July, the new state pension will increase by at least £6.75 to £175.35 a week from April 2020, equating to a rise of £351 a year. For those who reached state pension age before April 2016, the basic state pension will increase from £129.20 to £134.37

However, commentators point out the inconsistency in pension policy which will only see the lifetime allowance increased in accordance with the rate of inflation. As it stands, the LTA will rise to £1,075,000 in April 2020, from the current 1.055m.

Canada Life’s technical director Andrew Tully (pictured) said the increase to state pensions will be “very welcome” for the many retirees “looking to balance household budgets,” but he argues that if pension policy is to be consistent then the LTA requires a rethink.

“The small increase in the amount people can save into a pension before being hit by the lifetime allowance tax is helpful. However, this pension charge needs a fundamental rethink as recent government figures show just how many more people are being caught in this tax net.

“Simply ditching it as we already limit annual contributions would simplify the system and not penalise those people who are enjoying good investment growth.”

Helen Morrissey, pension specialist, Royal London, said: “This exposes a real lack of joined up thinking when it comes to this ridiculously complex web of tax allowances and highlights the need for urgent reform.”

Steven Cameron, pensions director, Aegon, pointed out that with wage growth above inflation meant plotting the LTA against the latter was incongruous.  “Although any increase is welcome, these increases are in line with price not earnings inflation. With wage growth remaining much higher than inflation, this means in earning terms the lifetime allowance is becoming less and less generous, leaving more individuals, and not just particularly high earners, at serious risk of breaching the limit.”

Michael Martin, team head, private client team, Seven Investment Management, called for the lifetime allowance to be abolished altogether.

“Many people, including myself, would like to see the LTA scrapped because it penalises those who save prudently and invest well by taxing them heaving when they breach the allowance,” he added.

Professional Paraplanner