Lifetime Allowance was a sledgehammer to pensions and Budget changes aren’t just to help top 1%
- Lifetime Allowance was an unnecessary pension sledgehammer which damaged investment and employment – if you already have brakes, you don’t need a brick wall to stop the car.
- Shame to see pensions become a political football being kicked around with hob-nailed boots – threats to reintroduce it will accelerate exodus of vital NHS and worsen health backlogs.
- Scrapping Lifetime Allowance isn’t just for the top 1% – it was always an illogicality that hurt DC pensions by punishing investment success, while also driving early retirement in DB schemes.
- This was quickest way to prevent senior doctors, nurses, consultants, GPs, police, prison officers and other essential public workers retiring early next year.
It is such a shame to see the sensible, practical Budget pension changes being used as a political football: The line that the Budget pension changes will only help the very richest people is simply wrong. These changes were needed to stop pension tax rules driving the most senior professionals to either retire early or reduce their working hours and political threats to reimpose it could see a mass exodus of these vital staff. This kind of meddling in pensions by politicians never ends well.
The Lifetime Allowance was always illogical – if you limit annual pension contributions, it makes no sense to punish career excellence or good investment performance: Controlling tax relief is already achieved by the annual allowance. The LTA on top of this is a penalty for those whose annual investments perform ‘too well’ over time, or who are promoted to senior positions during their career. It has never made sense to have penalties for both high annual contributions and a large eventual pension. If the brakes are working, you shouldn’t also need a brick wall to stop the car. This was the sledgehammer approach, which has created significant problems for pensions and employment.
Scrapping the Lifetime Allowance (LTA) is not about helping millionaires – £1million buys just £50,000 a year for DB schemes or £35,000 in DC: There have been complaints for many years about the unfairness of the LTA, particularly the fact that it is far more generous for Defined Benefit pension schemes (mostly in the public sector now) than for Defined Contribution arrangements. A public sector Defined Benefit (DB) pension worth just £50,000 a year is caught by the £1.073m cap, whereas those in Defined Contribution schemes (DC), could buy just £30-£35,000 of equivalent annual pension within the cap.
LTA rules have become more and more complicated over time, so scrapping it will reduce costs for HMRC and individuals: It costs HMRC money to operate the LTA, it costs the pensions industry money to operate it and it costs individuals money to obtain financial advice to plan for it. This seems a waste of resources. Scrapping it altogether is a good step towards much-needed pension simplification.
Vital NHS staff, police, firefighters, headteachers were planning to retire next year, so removing pension obstacles quickly was vital and brings in tax revenue from their earnings: There is an emergency in our NHS and widespread shortages of experienced staff. Removing rules that were going to drive more of the most senior people to retire early, many next year, was a sensible and urgent requirement. Indeed, by postponing their retirement, these valuable staff will also stay in work paying taxes (at 40% or 45%) which itself offsets some of the costs of the change and this was the quickest way to stem the tide.
Such a shame to see this policy is being turned into a political football, kicked around with hob-nailed boots: Instead of recognising this as the quickest route to helping avoid mass early retirements from NHS, nurses, doctors, armed forces, police, firefighters, rail workers and so on, the recent threats to reimpose it could accelerate the exodus of the most senior staff, worsening the NHS backlog and undermining pension confidence. Pensions should be about planning for the long-term, not scoring political goals.
One thought on “Lifetime Allowance was a sledgehammer to pensions and Budget changes aren’t just to help top 1%”
Sensible article. Very little media focus on fact that Labour introduced the allowance in 2006 @ £1.5m & then increased to £1.75m in 2009. Indexing up from 2006 would result in a c.£2.3m LTA today. Labour is playing politics. If J.Hunt had increased the LTA to £2.3m – or even back to where it was before the reductions (ie £1.8m) Labour still would have kicked up a fuss.
Secondly, how can it be fair that pensioners can face 55% marginal tax rates by extracting sums from their pension – whilst the top rate of income tax is 45% and only would apply at a higher income level (ie >£125k). The LTA is an unfair tax.
Thirdly Labour’s reversal pledge save for doctors is unfair. It is wrong to say doctors should receive a favourable tax regime – whilst other professions can go whistle & potentially face marginal tax rates of 55%.
Lane Cox & Peacock estimated c.1.5m currently potentially impacted by the LTA. Increasingly this figure will increase. It is not just a tax return to assist 15,000 doctors as the press make it out. Equally, it is not just applicable to DB civil servants. It applies unfairly to DC private sector workers.
Pretty convinced Rachel Reeves won’t understand the maths on her own pension – what would be the cost in the market to buy an index linked annuity to match the income she will get from one 5 year electoral term. She will be staggered to know the real cost to taxpayers – and that is a recent high annuity rates post the recent bond yield rise. The cost will be even higher in a couple of years when bond yields decline as anticipated. MPs should be forced into DC schemes and then they would start to understand pensions and pension tax better.
Labour is playing politics with this issue – creating a noise on an issue too complex for most of their MPs to fully understand because it is a cheap and easy target.
In conclusion – most commentators do not understand this issue properly. Ros you have a media platform and we are relying on people like you to get as much airtime and fight for what is fair. Let’s close the IHT exemption by all means – but let’s not have 55% marginal tax rates.