PENSIONSANDSAVINGS.COM

• Freezing the Pensions Lifetime Allowance will hit younger pension savers while older and wealthiest will already have protection at higher levels.
  
• Constant changes in rules and limits undermines long-term retirement planning.
  
• Chancellor should consider root and branch review of all the allowances to ensure a sustainable and stable system.
  
• This review should include identifying ways of incorporating provision for social care into long-term savings and pensions.
  

Damage to confidence in long-term retirement planning: I recognise that the Chancellor has a difficult balancing act, trying to fix the fiscal hole while also boosting growth.  The decision to freeze the Lifetime Allowance may seem like a handy way to bring in a bit of extra tax revenue, but it may well damage confidence in long-term pension planning. When people are saving for a pension they need some certainty about what lies ahead.  Instead, we have seen constant changes in the pension rules and limits, which have often undermined people’s ability to plan for future retirement resources.

Constant cuts and reversals undermine people’s pension plans: The repeated changes to the Lifetime Allowance rules are a classic example of the problem. The Lifetime Allowance has fallen in just the past ten years from £1.8million in 2011 to £1.5million and then to £1.25million and in 2016 it was cut to £1million.  At the time, we were promised that the limit would increase at least by inflation each year, which it duly did and is now £1.073m, however the inflation link promise has now been abandoned. How does that enable people to make their plans?

Freezing LTA will affect youngest and less wealthy, while older or wealthiest already protected: Of course, the older and wealthiest pension savers, who could afford to put maximum amounts into their pensions in past years, will not be affected by this change, because so many of them have already protected their Lifetime Allowance at the previous higher levels.  It is the younger people, or those who aspire to progress well through their careers, who will see their future pensions cut.

The Lifetime Allowance itself is illogical, especially for Defined Contribution pensions as it punishes good investment decisions: There is already an Annual Allowance for pension contributions.  This limits the amounts that can be invested each year with tax relief, but then surely the aim of that money should be to produce really good returns, which can help support a better later life lifestyle. That is why having a Lifetime Allowance as well undermines the purpose of the pension.  Instead of being rewarded for making good investment decisions, pension savers who do particularly well are penalised for it. That itself will deter them from making investments that can deliver better returns and also makes it impossible to plan properly to invest for retirement. Once someone has paid their annual contribution, they should not be afraid of investment success.  Clearly they need to be mindful of investment risk, but imposing a draconian tax penalty on those whose funds do well, is counterproductive.

Lifetime Allowance rules have also driven many doctors to retire early: For Defined Benefit schemes, the rules of the Lifetime Allowance have also led people such as doctors to retire early, since working longer can mean they lose money as they may exceed the Lifetime Allowance.

It is really time for a root and branch reform of pensions and the rules: I hope that the Government will soon decide to review all the rules around pension contributions, as well as the taxpayer incentives provided. The constant tinkering, rule changes and reversals of recent decisions is not a sensible or sustainable way to run a successful pension system. The current system of Allowances is far too complex and makes pension planning too difficult. An Annual Allowance, Tapered Annual Allowance, Money Purchase Annual Allowance and Lifetime Allowance all combine together to create a web of traps for unwary individuals or prevent proper planning. I hope the Chancellor will soon recognise the importance of streamlining pensions allowances across the board.

The Budget is also another missed opportunity to provide funding for social care: The shortage of funding for social care has been dramatically highlighted during the past year. It is, therefore, disappointing that there is still no plan to set aside money – both by Government and individuals – to  meet the costs of long-term care. Especially after the pain of the pandemic and the suffering of so many families with loved ones needing care, that there is still no Government action to fix our broken system. Using pension assets could be one way of doing so to assist people build up more long-term savings to help pay for their care if needed.

I welcome the intention to ensure pension funds’ assets can boost the economy and green growth – this must include both DB and DC schemes: The recognition that pension assets can help boost green growth and should be encouraged to do so is welcome. It is very important that this applies to both Defined Benefit and Defined Contribution pension schemes, since the overwhelming quantum of assets are in DB schemes and should not be just trying to chase gilts or safe bonds, but should be taking opportunities to produce far better returns as we rebuild the economy.