Budget 2015 – Criticism of £27k DC pension limit grows

Criticism of the Chancellor’s reduction of the lifetime allowance from £1.25m to £1m is mounting as advisers warn of reduced engagement with workplace pensions.

Experts are warning that increasing numbers of workers and senior executives will face having to disengage from pensions to avoid significant tax charges, now that DC pensions are limited to £27,00 a year index-linked with spouse’s benefit. DB savers will be able to have benefits of £50,000 a year and retain pension tax advantages.

The Chancellor has today confirmed the LTA will be index-linked from 2018, raising £600m.

Buck Consultants at Xerox head of trustee services David Piltz says: “There will clearly be concerns that the Chancellor’s announcement to reduce the lifetime allowance will further make pension savings unattractive to medium to high earners, which may disenfranchise those senior individuals who make decisions for UK pensions for their employees.”

Talbot and Muir head of technical support Claire Trott says: “The reduction in the lifetime allowance is a blow to all the positive changes made in the other pension reforms, not only will it penalise those in money purchase schemes more than in final salary schemes but it adds another layer of complexity to peoples retirement planning. This will mean another round of protections that people will need to decide if they need to apply for and possibly the choice to stop contributing for fear of tax charges at retirement.

“The recent downwards slide of the lifetime allowance goes against the promise of increased freedoms and the encouragement to save in a pension scheme. It would make much greater sense for the limit to be on contributions and not on both contributions and benefits. People can plan what they pay in but the value of what their benefits are at the end of the day is dependent on so many factors including investment growth, age when they choose to take benefits and charges.

Barnett Waddingham senior consultant Malcolm McLean says: “From a pension point of view it is very disappointing that the chancellor has seen fit to implement a further reduction in the LTA from £1.25m to £1m from next year, albeit from 2018 it will be index linked.

“Frankly this is unfair, unnecessary and unwise. Although a million pounds still appears to be and is a very large sum of money, which clearly is beyond the aspirations of the average pension saver, it does mean that for a defined contribution pension pot it actually only produces an annual pension of little more than £27,000, inflation proofed and providing for a spouse.

“In many respects the concept of having a lifetime limit is outdated and unnecessary, now that the annual allowance has been reduced to £40,000 and is the effective controlling mechanism for limiting tax relief on pension saving. The existence of the LTA and the regular monitoring against it overly complicates pension saving at a time when strenuous efforts are being made through automatic enrolment and other measures to encourage saving into a private pension.

“The LTA is superfluous and unfair in that it not only restricts the level of tax relief that can be given but also imposes a 55 per cent surcharge on those who perhaps through prudent management of their money and by securing good investment returns have unwittingly exceeded the limit.

“Perhaps the time has now come or at least it is fast approaching where the lifetime allowance should be scrapped, an added bonus being that it would deprive politicians of the opportunity to tinker with it further for no good reason other than as political tactic.”

Now: Pensions chief executive Morten Nilsson says: “Reducing the lifetime allowance will only impact a tiny percentage of pension savers. But, if the government’s long term goal is to encourage people to save a greater proportion of their salaries into pensions, there is a risk of a mixed message – save for the future, but not too much.

“Increasingly, pension reform is being used as a party political tool. While many of the recent changes are welcome and long overdue, pension policymaking should be based on long term objectives and built on consensus – not short term gain. This is why we believe that an independent pension commission could play a crucial role in scrutinising how these reforms impact one another.”