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.
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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
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.
-
James Halstead drives profits: should you buy?
James Halstead will rebound from a weak patch, while tax changes would be a buying opportunity
By Jamie Ward Published
-
Premium Bond winners – who won the November £1 million jackpot?
NS&I unveils November’s Premium Bond winners. Who bagged the jackpot and what other prizes are on offer?
By Vaishali Varu Published
-
Our pension system, little-changed since Roman times, needs updating
Opinion The Romans introduced pensions, and we still have a similar system now. But there is one vital difference between Roman times and now that means the system needs updating, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
We’re doing well on pensions – but we still need to do better
Opinion Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
Older people may own their own home, but the young have better pensions
Opinion UK house prices mean owning a home remains a pipe dream for many young people, but they should have a comfortable retirement, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
How to avoid a miserable retirement
Opinion The trouble with the UK’s private pension system, says Merryn Somerset Webb, is that it leaves most of us at the mercy of the markets. And the outlook for the markets is miserable.
By Merryn Somerset Webb Published
-
Young investors could bet on NFTs over traditional investments
Opinion The first batch of child trust funds and Junior Isas are maturing. But young investors could be tempted to bet their proceeds on digital baubles such as NFTs rather than rolling their money over into traditional investments
By Merryn Somerset Webb Published
-
Negative interest rates and the end of free bank accounts
Opinion Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK banking system slightly less awful, says Merryn Somerset Webb.
By Merryn Somerset Webb Published
-
Pandemics, politicians and gold-plated pensions
Advice As more and more people lose their jobs to the pandemic and the lockdowns imposed to deal with it, there’s one bunch of people who won’t have to worry about their future: politicians, with their generous defined-benefits pensions.
By Merryn Somerset Webb Published
-
How the stamp duty holiday is pushing up house prices
Opinion Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb.
By Merryn Somerset Webb Published