Aegon’s Steven Cameron comments on the risks of pensions becoming a political football, as Labour says it would reintroduce the Lifetime Allowance scrapped in Jeremy Hunt’s Budget.
In his 15 March Budget, Chancellor Jeremy Hunt announced the removal of the £1,073,100 pensions lifetime allowance alongside a raft of other changes to pensions tax allowances. However, Labour has said that if in power after the next General Election, it would reintroduce the lifetime allowance, other than for NHS doctors. It has also said it would reverse the other pensions tax changes which include an increase in the Money Purchase Annual Allowance, a measure set to benefit far more people over 55 across the earnings spectrum.
It’s really unfortunate whenever pensions become a political football subject to major change when a different political party is in power. Pensions are the very longest of long-term savings commitments, often for 40 years or more. So it’s really unhelpful when individuals are saving in good faith only to find politicians, of whatever party, change the rules to their detriment.
While no-one can expect pensions rules to remain fixed forever, the aim should always be to make sure changes don’t leave savers suffering retrospectively. If a Labour Government were to reintroduce a Lifetime Allowance, we strongly believe individuals affected should be able to apply for ‘protection’. In the past, when the Lifetime Allowance has been reduced, individuals who would be affected by the cut based on current pension savings could apply for ‘protection’, retaining a higher lifetime allowance, usually in return for not making any further contributions. Were Labour to reintroduce the lifetime allowance, committing to a similar approach would allow individuals to plan ahead with more confidence.
While a pension pot of the current limit of £1,073,100 may seem like a lot, a million pound pot will not provide a millionaire’s lifestyle in retirement which can often last for 20 or 30 years. Based on current annuity rates, a 65 year old might be able to buy an annuity of £3,700 (1) a month, which is subject to income tax. Also, 12 years ago in April 2011, the lifetime allowance was actually £1.8m. If this had been increased in line with inflation each year, then from April 2023 it would have been almost £2.5m.
While Labour may feel that the Lifetime Allowance change will benefit only higher earners, the increase in the Money Purchase Annual Allowance will have much wider benefit across the earnings spectrum and we’d hope would be seen as helpful by all political parties.
Many over 55s will have accessed their pension flexibly, perhaps during the pandemic or cost of living crisis. If they want to pay future pension contributions, perhaps on returning to the workforce, the previous limit on their and their employer’s contributions of £4000 is very restrictive and could stop many from being able to benefit from their workplace pension, which could discourage some from returning to work at all. The increase to £10,000 announced in the Budget makes huge sense and we hope will be here to stay.”
1.Based on the average of the top 3 annuity rates from the Money Helper annuity tool for an induvial aged 65 in good health, payable monthly and increasing with inflation.
