Update on pensions and the lifetime allowance rules
Further to my piece on lifetime allowance rules, yesterday the Financial Times published an editorial entitled “Richer savers do not need extra help.” While fairly arguing the need to ration pension tax relief, it missed the important point about the way lifetime allowance rules work in practice. Retroactive imposition would have been unconstitutional without the transitional protections the FT mentions, but as I noted in my post they have been offered in a way which requires active elections by pensioners who are largely unaware that they will be caught, and then have to navigate a minefield of rules and traps which some advisers and pension administrators do not understand. That is why, as the FT report “Pensions savings cap lands retired with £230m tax bill” (online 11 March; numbers corrected in 15/16 March paper edition) reveals, 4000 people have already paid an average £50,000 they should never have paid with proper advice. And they are but the tip of an iceberg of individuals whose inattention will now result in inevitable collision with these rules at their next ‘benefit crystallisation event’.
The Financial Times would not normally applaud a tax that levied two years’ earnings on anyone. An arbitrary and muddled tax that combines the worst features of mantraps and decimation should never be imposed by a Government on its citizens. We are not all in this together. As the limits are further reduced, more will be caught. Protection for choices made in the past should be automatic and available retrospectively to undo this mischief. That HMRC’s discretion to backdate protection has been removed is proof enough of the Government’s intentions.
We need to raise more interest in this matter, both to expose Government’s behaviour and to alert those who have not yet taken out protection. The window for FP14 is almost upon us.
Postscript – 20 March
In Wednesday’s budget, the Chancellor said that “we will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits.” Despite this, HMRC’s Pension Policy team have just told me that “there are no plans to review the lifetime allowance tax charge.”
A single example to remind you how Byzantine these rules are: the difference today of having commenced an indexed pension of say £45,000 on 5 April 2006 compared with one commenced just one day later is some £600,000 of allowance – leading (if there is a second pension) to a penalty of £150,000 (or £330,000 if taken as a lump sum).
To avoid even worse charges, people are forced to draw their pensions early (in a most unfavourable annuity market). This is not “complete freedom”. The Chancellor should fulfil his promise.