Pickpocketing the pensioners

There are several good rules to successful pickpocketing. First, choose the right victims: there’s no point in robbing the poor, as they have nothing worth stealing; and it’s not a good idea to rob the super rich, since they are usually well protected. To maximise revenues, go for the reasonably comfortable middle classes. The prize is worthwhile (and less-well-off bystanders won’t go to their aid). Second, make sure that they only discover that you’ve left them less comfortable long after you’ve made your getaway: ideally many years from now (so you’ll be able to do them over again and again in the meantime).

This prescription has proved irresistible to generations of politicians. You’ll probably remember Gordon Brown’s raid on pension fund tax credits: that’s because he only mastered part of the formula, and forgot about the not being discovered bit. As you probably know George Osborne is considerably more skilled in that area.

So let me draw to your attention one of those provisions that is so arcane you probably won’t want to read any further: the lifetime pension allowance. When politicians decided that it was iniquitous for “rich” people to get tax relief through the pension system (although a better word would be tax deferral, since any annuity you buy out of these savings is taxed as income in the future), instead of stopping you paying too much into your scheme, they decided to tax any excess after it was too late to change your mind. The rate is 25% on any annuity, in addition to normal income tax on what’s left – equivalent to 58.75%. So when Osborne criticises Labour for wanting to reintroduce the 50% rate, perhaps they should remind him that the rate for some people is already higher.

A lifetime allowance was established: if your pension pot exceed £1.5m you would be liable to the tax. This was supposed to be equivalent to a pension of £75,000 – more than most people expect, and so most people didn’t bother to pay an adviser to check this out. Each year, the limit went up, so that by 2012 it stood at £1.8m. Fair enough. But then it came down, to £1.5m; and buried in the Finance Act 2011 was a system to avoid this retrospective iniquity by applying for “fixed protection”, or FP. Were you told about that directly? No. And even if you were, and your pension was less than £75,000, you probably thought you were still immune. But if you had read the small print, you would discover that a “pre-commencement” pension that you have already drawn is scaled up by a factor, not of 20, but of 25 – so £60,000 becomes the limit.

We are told that this outrageous discrimination against more vulnerable pensioners (those who need to draw their pensions rather than deferring them) is because they withdrew tax-free lump sums – or if they didn’t “they had the opportunity to do so.” But if a pensioner didn’t take a tax-free lump sum, perhaps this was because the opportunity wasn’t attractive – in which case why on earth should he suffer this penalty?

If you’re discovering that now, it’s too late to do anything about it. Applications for FP had to be in before April 2012, and (while HMRC can normally consider late applications for many reliefs) the Government have specifically included provisions removing HMRC discretion to consider late applications. This is surely the proof that they intended to trap the unwary.

They might have got away with it for many years to come were it not for their inability to exercise any self-restraint. In April 2014 the limit comes down again, to £1.25m; and you have a similar opportunity to protect the £1.5m lifetime allowance by applying for “FP14”. But only if you act in the next few weeks.

Yesterday the Supreme Court heard a case about a man who felt he was tricked by the small print in a consumer credit contract over a sum of £1500 (he bought a computer in 1998), and was so enraged by the unfairness of it all that he has pursued the matter for many years at vast expense. I know how he feels.

I don’t need to remind you that this is a blog, not advice. And you’d better pay for some, from a professional.

Postscript

To illustrate just how unfair is the treatment of the pre-commencement pension, consider the difference between taking your first pension of say £25,000 immediately before A-day in 2006. Your next benefit crystallisation event (e.g. drawing you AVCs) is say today, when your pension has risen to £33,000 (it’s RPI linked). The pension takes £825,000 (25x£33,000) out of your lifetime allowance. Now suppose instead that you drew the first pension a week later. Its value would crystallise immediately, at 20 times £25,000, or £500,000. The difference – for someone taken over the LTA limit by other pensions – is a cash cost of £179,000.

This system was designed with the intention of LTAs increasing each year, where the increased allowance would compensate for this anomaly. It was also introduced in a regime when annuity rates were much higher, and the £1.5m limit in 2006 could have bought an income of around £75,000, while today an index-linked annuity for a 60-year old man will struggle to buy half that. I think that Parliament intended to protect pensions of £75,000, not pots of £1.5m.