The lifetime allowance is hugely unfair on people in private pension schemes

The lifetime allowance on pension pots isn’t fair. It massively favours people on defined benefits pensions, and penalises those in defined contributions schemes.


Some pensioners will have much nicer retirements than others

The recent cut in the lifetime allowance (LTA) is maddening for a very long list of reasons. I will be writing more on it next week and you can read articles by me and by James Ferguson from last year (the last time it was cut) on why we really, really hate the LTA.

One reason on my list is the fact that it allows those on defined-benefits (DB) pensions to have much higher levels of untaxed income than those with defined contribution pensions.

If you have the latter, you are now to be able to have up to £1m in your account on retirement before being hit by punitive taxes (55% for most people). Today, £1m would give you a pension income of around £25,000 (based on annuity rates). You could, of course, under the new rules, keep the money invested and make a higher income than that but if you did you'd be taking all the usual risks that come with equity and bond markets along the way.

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However, if you have a DB pension (the kind that guarantees you an annual percentage of your average or final salary on retirement) you have no such problems: you can get an income of a good £50,000 (inflation linked!) before your pension pot is deemed to be of a size that makes it liable for LTA excess tax (which is 55% on capital withdrawals or 25% on top of your marginal rate of income tax for income withdrawals).

That's because, for LTA purposes, DB pensions are not valued relative to any prevailing interest rate but at a rate of 20 times the income you get from it, plus any tax-free cash you take. That's nice for DB holders, the majority of whom now work within the public sector.

But as Roy Davidson, of Bond Dickinson, says, "If a correct' capitalisation figure was used for a DB scheme with RPI indexation and 50% spouse's pension" the multiple used "would be nearer to 40."

AtMoneyWeek, we don't think any pensions should be subject to any LTAs. But if they are going to be, we do think that the application of the system should be fair to all types of pension scheme. Right now, it really isn't.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.