Budget 2015: lifetime pension allowance slashed
George Osborne has confirmed that the lifetime allowance is to be cut from £1.25 million to £1 million from April 2016, but will then rise in line with inflation from 2018.
The allowance, which caps the amount of money people are able to save tax-free in a pension over their lifetime, has been successively reduced since 2011, when it peaked at £1.8 million.
According to Osborne this action will save the government £600 million a year, but it was immediately attacked by one pensions industry insider for being a "cap on aspiration."
Nigel Green, chief executive of advisory firm the de Vere Group, slammed the chancellor's move, claiming it was a cheap way of boosting government coffers. He said: "This pre-election gimmick is a disincentive to save as much as possible for retirement and therefore it could be harmful to Britain's long-term economic success.
"With the burgeoning pensions crisis and the looming care crisis, amongst many other factors, we need to urgently revitalise, promote and nurture a savings culture in the UK as a matter of priority. Continually cutting the LTA goes against this concept.
He added: "This move is a slap in the face for those who have worked hard and saved hard, prudently putting money aside all their lives, in order to be able to enjoy their desired retirement."
Tom McPhail, head of pensions research at Hargreaves Lansdown agreed. He added: "The stability of the pensions system is already being tested by major upheavals to workplace pensions and to the rules around drawing a retirement income. Welcome though they are, the current reforms are being introduced in a very tight timeframe.
"Constant political tinkering and raiding of the pensions piggy-bank not only erodes investors' confidence, it also undermines their willingness and ability to save for retirement. What we need more than anything now is a period of calm to allow the current reforms time to bed in."
According to the pensions guru, Ros Altmann, a pension worth £1 million would currently buy a 65-year old couple with an inflation-linked income of around £25,000 a year. However, a saver in a ‘gold-plated' final salary scheme could receive double that figure.
From 2018, Osborne also said that the allowance would rise in line with inflation to provide some protection for those investors currently saving for their retirement.
However in spite of this experts still fear many average savers could be caught out. Jon Gwinett, pensions technical manager at Nucleus, said: "Many more people will be bought into scope of the tax charges which penalise those fortunate enough to exceed the limit. There's a danger that the creeping expanse of scope means that people in middle ranking public sector jobs will need to consider the impact of the LTA on their pension plans."
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).