Nothing demonstrates better the ability of governments – red and blue – to turn a deaf ear than their interference in our pensions.
Yes, HS2 (slower than broadband) follows closely, but pensions win because government interference has long been debilitating to our personal finances.
I’m not talking about state pensions, which are increasingly becoming an extremely costly financial albatross around the government’s neck.
I’m referring to pensions that we fund with our own hard-earned wages (plus a dose of tax relief) to build a pot for our retirement. A kitty that will have to keep many of us financially comfortable for 30 years, maybe even longer.
Boost: Chancellor of the Exchequer expected to increase lifetime allowance in first budget
These, whether company pensions or self-invested personal pensions, have become mired in rules that even the late Stephen Hawking would have struggled to understand.
I challenge anyone working in the pension industry to explain them in plain language. I have yet to meet anyone who can.
The fact is, our pensions are in danger of being destroyed by Treasury officials who don’t care – partly because their own pensions are as bulletproof as they come. Gold plated. Solid as a rock. Funded by taxpayers, that is, you and me.
Friday’s exclusive report in the Daily Mail confirming that Jeremy Hunt, Chancellor of the Exchequer, will increase the lifetime allowance today is further evidence that the Treasury’s approach to pensions is schizophrenic. There is no long-term strategy; our pensions are there to be played at will.
Why this game with our financial future? That’s because Treasury officials think we should be grateful that most of us get a tax break on our pension contributions.
Such generosity, they say, comes at a price – a license to change pension rules at will. Changes that make foresight hellish.
Changes that bind us in financial knots. Changes that mean we have to employ expensive financial advisers to make sure we don’t run into them.
An increase in the lifetime allowance makes sense. This is the amount your pension fund can grow to before any surplus is subject to a punitive tax upon access — a tax of up to 55%. The lifetime allowance is a misnomer. It’s a cap.
In the past (April 6, 2010 to April 5, 2012), the lifetime allowance was £1.8m – but a series of chancellors have since scrapped it.
It fell to £1million in 2016 and now stands at £1,073,100. Before the chancellor’s signal that the allowance would be increased in today’s budget to £1.8million, we were told it would be frozen until at least 2026 – it’s all part of the government’s plan to improve its own financial affairs (not ours) command.
Limit: the lifetime allowance is the amount your pension fund can reach before any excess is subject to punitive tax when accessed
Of course, some readers will say that the lifetime allowance only affects wealthy people, so it should remain frozen. It’s a fair argument – just over 42,000 people had pension funds that breached the allowance in the tax year ending April 5, 2020.
Most were doctors and surgeons with generous pension benefits accrued in the NHS pension scheme. Others were senior officials.
But the number of pension funds violating the allowance has risen sharply over the past three tax years.
Indeed, many medical professionals took early retirement during this period, citing wage erosion and the financially burdensome lifetime allowance as reasons.
And as many as 1.6 million people have stopped saving altogether — or slowed their saving to a snail’s pace — so they’re not hitting the cap.
If the benefit had remained frozen, more people – for example, owners of small and medium-sized businesses, the real engines of our economy – would have been caught off guard. In the longer term, millions of individuals would have seen their pension funds rub shoulders with the allowance.
Jason Hollands, managing director of Bestinvest, part of wealth manager Evelyn Partners, did some math for Money Mail, based on the lifetime allocation freeze until 2026.
He says a person with a pension pot of £850,000, earning £120,000 a year and paying pension contributions equivalent to 15% of his salary, could arrive in 2026 with a pension pot worth £1,102,395.
This calculation is based on annual wage increases of 5 percent and an annual growth in investment within the pension of 6 percent. In other words, they would be in extra-tax territory if Mr. Hunt had not acted.
Although Labor will no doubt argue that a rise in the lifetime allowance is Mr Hunt only looking after the wealthy, it was a Labor Chancellor – Alistair Darling – who got him to the dizzying heights of £1.8million.
While Darling, following the 2008 financial crisis, said it would remain at that level until the tax year beginning April 6, 2015, it is the Tories (initially with a little help of the Liberal Democrats) who then reduced it to £1million in 2016, before increasing it to £1,073,100 in 2020, where it has remained ever since.
So Labour’s shadow chancellor Rachel Reeves won’t have a leg to stand on if she stands up after Mr Hunt’s budget speech and attacks the increase.
Philosophically, some would argue that there should be no lifetime allowance at all. Mr. Hollands sits in this camp. He says it’s financially immoral and should be removed.
Squeeze: Chancellor Jeremy Hunt could impose a restriction on the amount of tax-free money people can take out of a pension
For what? It’s simple. For those who manage their pension pots themselves or have them invested in a defined contribution pension fund, the allowance penalizes the success of the investment. It is a tax on aspiration, pure and simple.
Why should a person who manages his pension fund expertly be taxed, while another person who is less successful in investing escapes?
Given that the annual amount that can be paid into a pension fund by employees and employers is capped at £40,000 (£60,000 from the start of the new tax year), that should be it.
Subject to compliance with this annual ceiling, the Government should then encourage all savers to take care of their fund and to strive to increase its value.
Two other important points about the lifetime allowance.
Firstly, it seems horribly unfair that some people have refrained from funding their pensions in recent years for fear of going over the £1,073,100 cap.
Yes, some have been able to sign so-called fixed protection declarations allowing them to lock in higher lifetime caps of £1.25m, £1.5m or £1.8m, provided that they stop contributing to their pension.
But many others with retirement pots close to the lifetime allowance have simply stopped putting money into retirement plans. I imagine many of them are now spitting feathers over the fact that they have been denied the right to use pensions to finance their retirement.
Yesterday I met one of these coffee-spitting pen pals, a charming public relations consultant who worked in the financial services industry for over 20 years and in the process amassed a sizable fund pension. She doesn’t make a lot of money, but has accumulated money through thick and thin.
Before I could take my first sip of double espresso, uninvited, she launched into a tirade against Mr. Hunt, the Treasury and politicians in general. “I feel like I was cheated on,” she said. “Used, financially abused, a mere pawn of Treasury interference.
For three years, she no longer contributes to her retirement for fear that her fund will exceed the life allowance. She was effectively excluded from the pension system.
Yes, the new £1.8million lifetime allowance means she will be able to start contributing to her pension again. But she lost three years of savings — and three years of return on investment — through no fault of her own.
I doubt Mr. Hunt will apologize to those like her who have been prevented from building even more formidable retreating fortresses.
But he should do well. At the very least, they should be told why it has been deemed acceptable for so many years for the government to compromise people’s ability to save for their future.
Finally – and this is my great fear – in return for a more generous lifetime allowance of £1.8 million, a larger annual allowance of £60,000 and greater opportunity for workers to rebuild their pensions after accessing them, will Mr Hunt have something nasty up his sleeve from retaliatory pensions? A form of compensation? Maybe not today, but maybe next year.
Some, including Mr Hollands, fear that may be the case.
Mr Hunt could impose a restriction on the amount of tax-free money people can take out of a pension.
Currently, 25% of a pension fund can be taken as tax-free money, all of which is then taxed as income. Mr Hunt could cap it in cash at, say, £250,000.
Alternatively, it could bring pension funds into the inheritance tax regime. Or he could turn to the state pension and bring forward the date by which people have to work longer to collect it.
No more waste for pensions? More interference in pensions? No more expensive financial advisors? Do not exclude any of these. We will find out everything before the end of the day. Tin hats ready.
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