In last week’s podcast, John and I talked about the UK pensions system. It is constantly in transition and increasingly unfair. The older generations appear to be consistently favoured over the young, and public sector workers consistently favoured over private sector workers.
The Lifetime Allowance (which caps the amount you can have in a pension at £1.25m before taxing you at 55% on the rest) is a particular bugbear of ours – before the last election we even set up a petition on the government website to get it scrapped.
But it isn’t just us any more. An increasing number of people have noticed just how mean it is to successful investors (who are taxed for doing well – see our work on this here) and on those with defined contribution (DC) pensions, who need to save more to get less than those with defined benefits (DB) pensions. A letter arrived today from a reader on just this subject. He has a DC pension. He’s done the numbers, and he’s pretty angry.
“A civil servant whose starting defined benefit pension is £50,000, and who gets a further lump sum of £150,000 doesn’t tip the threshold, because the pension is valued for the purposes of tax at £1.15m (£50,000 x 20 = £1m + £150,000 = £1.15m). The public sector pension is likely to have a number of benefits, such as inflation linking and 50% spouse’s benefit, so if the pensioner dies before his or her spouse the survivor is covered too.
“If a 65-year-old with a private defined contribution pension wanted to buy an annuity that will pay a starting £50,000 with inflation linking and 50% spouse’s benefit would need approximately £1.6m rather than £1.15m, not taking into account the £150,000 lump sum.”
Not fair is it? I don’t think so. And our reader doesn’t either.
“It seems increasingly apparent that the UK is a country of pensions apartheid, where many civil servants and public sector workers enjoy valuable and entirely secure pension benefits underwritten by the taxpayer, while those in the private sector must save and suffer investment risk while ending up with a pension potentially half that of a comparable position in the public sector.”
Time perhaps for another petition