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.
-
Which UK region has the most in savings? Average savings by areaThe amount people have in their savings differs from region to region in the UK. How does your nest egg compare to those living nearby?
-
Doug and Mary Perkins: Specsavers’ clear-sighted foundersHelped by the deregulation of the sector in the 1980s and brilliant advertising, Mary Perkins and her husband Doug have taken Specsavers to the top of the optometry market
-
Our pension system, little-changed since Roman times, needs updatingOpinion 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.
-
We’re doing well on pensions – but we still need to do betterOpinion 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.
-
Older people may own their own home, but the young have better pensionsOpinion 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.
-
How to avoid a miserable retirementOpinion 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.
-
Young investors could bet on NFTs over traditional investmentsOpinion 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
-
Pandemics, politicians and gold-plated pensionsAdvice 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.
-
How to have a low-tax retirement in the sunNews Greece is to offer a ten-year tax incentive to foreign pensioners. That’s a pretty good offer, says Merryn Somerset Webb. But it might not last.
-
Prepare yourself for a rise in capital gains taxOpinion With the UK desperate to raise more money to cover the massive rise in public spending, squeezing more revenue out of capital gains tax looks like an obvious thing to do.
