THE pensions industry has reacted angrily to George Osborne’s Budget cut in the lifetime allowance (LTA), branding it “unnecessary” and warning it could persuade wealthy savers to move their pensions away from the UK.
In a widely anticipated move, the maximum amount individuals can save into pensions while still claiming tax relief was cut from £1.25 million to £1m, one of a raft of measures targeting the relatively well-off in order to fund giveaways elsewhere.
Jon Gwinnett, pensions technical manager at Nucleus, the Edinburgh-based “wrap” system for pensions advisers, said the downwards creep in the allowance meant many more people would now have to start taking it into account when it came to pension planning.
He said: “Further reductions in the lifetime allowance seem unnecessary. They mean many more people will be bought into scope of the tax charges which penalise those fortunate enough to exceed the limit.
“There’s a danger that the creeping expanse of scope means that people in middle-ranking, public-sector jobs will need to consider the impact of the LTA on their pension plans.
“It also begs the question, yet again, of why we persist in having a restrictive annual allowance if government see the LTA as the means of regulating total pension saving and tax relief expenditure.”
Gwinnett welcomed proposals to extend pension freedoms to those who have already committed to an annuity, although he expressed “very real concerns” about how any secondary market would be regulated.
He said it remained unclear whether the re-sale or surrender value of annuity contracts would offer good value for consumers.
It is not the first time the Chancellor has targeted wealthier pensioners in order to find some wriggle room for give-aways without softening his stance on the deficit. Last year, the LTA was cut from £1.5m to £1.25m. That followed a reduction from £1.8m in 2011.
Nigel Green, chief executive of financial consultancy deVere Group, said the further reduction was “scandalously counter-productive”.
“This pre-election gimmick is a disincentive to save as much as possible for retirement – and therefore it could be harmful to Britain’s long-term economic success,” he said. “With the burgeoning pensions crisis and the looming care crisis, amongst many other factors, we need to urgently revitalise, promote and nurture a savings culture in the UK as a matter of priority. Continually cutting the LTA goes against this concept.
“This move is a slap in the face for those who have worked hard and saved hard, prudently putting money aside all their lives in order to be able to enjoy their desired retirement. It is nothing short of a dangerous cap on aspiration.”
Green predicted the latest changes would persuade more pension savers to look for alternatives. A scheme to move pension pots overseas into a low-tax jurisdiction is already growing in popularity.
But John Fox, director of the pension provider Liberty SIPP, said he was not overly concerned by the cut, saying the latest reduction in the LTA had been “an easy win given the small percentage of people it will impact”.
“Even then, indexing the lifetime allowance from 2018 gives something back to the very people the Chancellor has just pick-pocketed,” he said.
He added: “Official confirmation of the ‘Great Annuity Escape’ will be music to the ears of many pensioners and will serve as a veritable vote-winner for the Chancellor. The devil is in the detail, of course. Forget actuaries, the Chancellor will have to employ the services of Stephen Hawking to come up with a formula for calculating the value of annuities.
“On a technical note, pension companies don’t keep their all their assets in cash, and they will need to sell huge amounts of other assets if there is a run on them.
“This could take many to breaking point and be potentially cataclysmic for the industry.”
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