MSE News: Budget 2015: Pension lifetime allowance to fall to £1m

Former_MSE_Paloma

The amount savers can put into a pension over their lifetime will fall from next year from £1.25m milion to £1m...

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Budget 2015: Pension lifetime allowance to fall to £1m'




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SnowMan

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414106/OOTLAR_2015.pdf

2.35 Pensions - lifetime allowance
Legislation will be introduced in the new Parliament to reduce the pensions lifetime allowance to £1million. Fixed and individual protection regimes will be introduced alongside the reduction in the lifetime allowance to protect savers who think they may be affected by this change. This change will have effect from 6 April 2016. Legislation will also provide for increases of the allowance in line with the consumer prices index I from 2018

jamesd

The £1 million would today buy a 65 year old an RPI-linked annuity of £33,070. I don't think that it is reasonable to be calling people "wealthy" at that level of income, not even when topped up to around £41,000 by say £8,000 of state pensions. For context, around 10% of the UK population are millionaires. It doesn't seem sensible to me to effectively declare that 10% of the population are wealthy either. Well off potentially, certainly, but not wealthy.

These sorts of amount look big to someone just starting work with a lifetime of earnings and saving ahead of them but not so big to someone living in the south east who has to provide an income for the rest of their life when retiring.

The Budget 2015 announcement itself:

"1.232 It is important that the UK’s pensions tax system remains fair, affordable and sustainable for the future. In 2013-14, Income Tax relief for pension savings cost the government around £34.3 billion, up from £30.8 billion in 2009-10, with around two-thirds of this relief going to higher or additional rate taxpayers.103 To protect the public finances from this growing cost, the government will therefore reduce the lifetime allowance for pension contributions that benefit from tax relief from £1.25 million to £1 million. This will be effective from 6 April 2016. The lifetime allowance will be indexed to increase annually by CPI from 6 April 2018. Over 96% of individuals currently approaching retirement have a pension pot worth less than £1 million, so this change will affect only the wealthiest pension savers."

Triumph13

I think it's hard to argue that being in the top 4% makes you anything other than 'wealthy' - despite most people's definition of wealthy being "someone significantly richer than me"

jamesd

A million Pounds only puts you in the top 10% of the country, not the top 4%. It's only the top 4% of pension pot sizes. Having the terms used for such large percentages of the population just doesn't seem reasonable or sensible.

VT82

I'm not really up to speed on pensions. Is £1m the new limit to how big the pot can be, or just how much of the pot can have come from your own and your employers' contributions (as opposed to growth)? If it's the latter, you'd hope people hitting the threshold would have a pot nearer £2m by retirement, and hence be pretty wealthy.

Triumph13

VT82 wrote: »

I'm not really up to speed on pensions. Is £1m the new limit to how big the pot can be, or just how much of the pot can have come from your own and your employers' contributions (as opposed to growth)? If it's the latter, you'd hope people hitting the threshold would have a pot nearer £2m by retirement, and hence be pretty wealthy.

It's the former I'm afraid - which means you have to guess carefully about how much growth you'll have if you're going to come near it!

Triumph13

jamesd wrote: »

A million Pounds only puts you in the top 10% of the country, not the top 4%. It's only the top 4% of pension pot sizes. Having the terms used for such large percentages of the population just doesn't seem reasonable or sensible.

That all depends on where you are standing. If you are in the bottom 10% of UK incomes then I think you're perfectly justified in calling anyone in the top 10% 'wealthy'. If you are in some third world countries then you can equally call just about anyone in the UK wealthy.


I don't think anyone can really complain about losing pension tax breaks if their tax-assisted pension income is 1.5x the average working income. If they want to save more without benefit of additional tax breaks then good on them.

kidmugsy

Triumph13 wrote: »

I don't think anyone can really complain about losing pension tax breaks if their tax-assisted pension income is 1.5x the average working income.

Yes, but I think they can reasonably complain that the Lifetime Allowance is a peculiarly clumsy way to do it. Maybe there's little alternative, but I'd say there's a chance here for Balls to come up with a more intelligent way. Except that he wanted to use this blunt axe too. Crafty Osborne.

DesG

The fact that it is index linked is actually a big win, in the future, it will be higher than the current £1.25M.

jamesd

Triumph13 wrote: »

That all depends on where you are standing.

It's the nature of wealth that people do tend to make it a relative measure, with around twice their current income being a particularly common definition.

Triumph13 wrote: »

If you are in the bottom 10% of UK incomes then I think you're perfectly justified in calling anyone in the top 10% 'wealthy'.

I don't think it's justified, I think it shows a lack of knowledge and understanding of the UK population as a whole and of how much money it takes to produce an income in retirement or even to own a home in the SE of England.

I don't think a person in the bottom 10% could justifiably call someone with around £267,000 wealthy either. Maybe that person in the bottom 10% might. Then I'd point out to them that that is how much it would cost to buy an annuity paying as much as the flat rate state pension would pay, so they are themselves wealthy by that definition. Even more so once the value of the NHS and other state benefits that they might receive are added in to their total wealth.

Triumph13 wrote: »

If you are in some third world countries then you can equally call just about anyone in the UK wealthy.

We all are relatively wealthy compared to many.

Triumph13 wrote: »

I don't think anyone can really complain about losing pension tax breaks if their tax-assisted pension income is 1.5x the average working income. If they want to save more without benefit of additional tax breaks then good on them.

That isn't how the lifetime allowance works. It isn't a cap on tax-assisted pension income, the tax assistance for which is provided in large part by the tax relief on the way in. It's a 55% tax on the value of a pension pot above the limit, including simply inflation as well as any investment growth.

Just to show how silly it is, pay in gross £20,693 at age 20 and receive just £4,138.60 of tax relief on the way in. Now get 9% growth over the following 45 years, a little more than the long term growth of the UK stock market, 5% plus inflation. The pension pot value at the end? £1,000,036.

I do think that such a person could complain about being told that they have to pay 55% tax on say half a million Pounds if instead of paying in £20,693 they paid in £31,000.