£137k tax bill for extra 1pc return – criticism of LTA increase grows

Pensions experts have rounded on media reports that the Chancellor is set to reduce the lifetime allowance from £1.25m to £1m in tomorrow’s Budget.

Dr Ros Altmann, the government’s business champion for older persons, says the move, if confirmed, would be bad for pensions as it would penalise individuals whose investments performed well.

Figures fromRetireeasy.co.uk show a 35-year-old earning £60,000 with a predicted pension fund of £1m at retirement age would be hit by an extra £137,500 in tax for an unexpected increased return of 1 per cent, assuming projected pension returns of 7 per cent. The calculation assumes salary growth of 2.5 per cent, an existing fund of £25,000, 8 per cent contributions and a state pension age of 67.

An unforeseen extra return of 2 per cent would cost an extra £275,000 in tax and 3 per cent a year would mean an extra £550,000 tax. 

The Treasury is yet to confirm reports in The Sun newspaper that state the Chancellor is planning to reduce the lifetime allowance by £250,000 to pay for a series of tax giveaways.

Experts have pointed out that a £1m lifetime allowance would also put pressure on DC savers, who would only be able to build up around £30,000 of income in a tax-advantaged environment. DB tax-advantaged pensions will also be reduced, but their more favourable multiple allowance means £50,000 would be allowed.

Altmann says: “If this report is true, then this is bad news for pension savers, who will be penalised for having good investment returns. It makes no sense to control the lifetime allowance when you have a low annual allowance.”

RetireEasy.co.uk founder Naomi Collinson says: “We are disappointed the Chancellor appears to have succumbed to pre-election posturing with the Lib Dems rather than sticking to his “pension freedom” mantra. The reduction in the lifetime allowance, if it is announced tomorrow, is wrong on so many levels. Chiefly, it creates confusion and muddles
the Government’s ‘pensions freedom’ message, by disincentivising the public from saving too much. It is certainly a further attack on Middle England, just the voters we thought George was trying to woo.

“The message from the Government is clear: avoid good fund performance as you could be penalised.”

MGM Advantage pensions technical manager Andy Tully says: “This would bring the LTA down below fatcats and into territory where it is starting to affect middle England. £30,000 a year for a DC saver is not a massive pension. Some people may stop contributing as a result, for fear they will end up paying more tax if they stay in pension.”