Pension stealth attack
EVER SINCE then Chancellor Gordon Brown unleashed his notorious pension stealth tax in 1997, the Treasury has viewed our funds as a cash cow to be raided when funds run dry.
It has also milked pension savers by shrinking the lifetime allowance, the total amount you can have in your pot before it becomes subject to swingeing tax charges.
Its value has been slashed in a move that has hit high earners such as dentists, lawyers and accountants, and public sector workers with generous final salary schemes.
Lately, it has been blamed for forcing
GPs into early retirement as many see no point in working once they bump against the lifetime allowance. Could this be a once-in-a-lifetime problem for you?
LIFETIME THREAT
In 2012, the lifetime allowance stood at
£1.8 million. Four years later, it had been cut to “just” £1 million. It has crept up slightly since then, and will increase again on April 6, to £1.055 million for most people.
This has helped the Treasury top up its coffers, with the tax take rising from less than £10 million in 2006/07 to £110 million in 2016/17, according to a freedom of information request by Canada Life.
Arguably, the lifetime allowance is a nice problem to have. Most people can only dream of having £1 million in their pension, which is almost 10 times the average UK retirement pot which stands at £118,200, according to PensionBee. However, it does cause difficulties for innocent victims of an arbitrary and aggressive tax.
Anybody who exceeds their allowance and takes the excess money as a lump sum incurs a punitive tax charge of 55 per cent. If they leave it inside their pension they face an immediate 25 per cent tax charge, plus income tax on withdrawals.
TAX SHOCK
Clare Moffat, head of business development at Royal London Intermediary, said if you have long service on a final salary scheme the lifetime allowance could creep up on you unexpectedly.
Many savers automatically cease pension contributions if they risk exceeding the allowance, but Moffat said this is not always the right thing to do: “You could miss out on sizeable employer pension contributions and valuable death benefits, so paying the charge may still be in your best long-term interests.” GPs have attacked the lifetime allowance but Steven Cameron, pensions director at Aegon, said scrapping it for one profession would only complicate things further.
INCOME LEVELS
Andrew Tully, technical director at Canada Life, said £1 million will not buy a ‘fat cat’ retirement income: “It would currently provide an annual lifetime income of around £25,387 for someone aged 65.”
However, final salary workplace scheme members could receive £51,500 a year before hitting the lifetime allowance, as these apply more generous multipliers.
Most of these will work in the public sector, as final salary schemes have been phased out in the private sector.
Tully recommended taking independent financial advice if you risk breaching the limit: “You will lose employer contributions if you leave the company scheme but it may offer alternative arrangements, such as paying more salary in lieu.”
Some individuals have been able to ‘protect’ a higher lifetime allowance of around £1.25 million, but “this is a complex area and advice is essential to avoid falling foul of the rules”, Tully added.
ANNUAL LIMIT
The lifetime allowance was introduced to stop the super wealthy using pensions as a tax dodge, but Tully said it penalises people for successful investing: “Savers are already subject to the annual allowance, which limits contributions to £40,000 a year or 100 per cent of your salary, whichever is lower. This strengthens arguments that the lifetime allowance should be scrapped.”
Check whether you are at risk but do not expect an outcry from MPs – their final salary schemes enjoy a far more generous lifetime allowance.