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Pressure for Pension Reform Grows Ahead of Budget

The State Pension will increase 3.9% next year but the Lifetime Allowance edges up just 1.7%. Experts are urging an overhaul of the " ridiculously complex" system

Holly Black 17 October, 2019 | 9:34AM

Nest egg

As the Budget draws closer, the Government is being urged to overhaul the pensions system. Industry experts want to see changes to tax on pension savings and for increases in the Lifetime Allowance to be brought in line with annual rises in the State Pension, to ensure people are able to save enough for retirement.

Pensioners are set to see a 3.9% increase to the State Pension next year, with weekly payments rising £6.60 to £175.20. It means retirees will receive an extra £343 a year from April 2020.

Retirees receiving the old basic state pension will receive an extra £5.05 a week, bringing the weekly payment to £134.25 for single people.

The “triple lock” guarantee is the government’s promise that the State Pension will rise by whichever is the greatest of inflation, earnings or 2.5%. Latest figures show that inflation in September – the month in which the State Pension calculation is usually made – came in at 1.7%. However, average earnings grew by 3.9% in the year.

But the Lifetime Allowance will only increase by 1.7% as its rises are linked to price inflation not earnings growth. In the 2020/21 tax year, the Lifetime Allowance – which is the maximum amount that can be saved into a pension while still receiving tax benefits enjoyed by pension savings – will increase to £1.073 million from the current level of £1.055 million.

For Defined Benefit pensions, the limit is set as an annual income and is expected to increase from £52,750 to £53,750.

A Complex Web

Annual increases to the Lifetime Allowance were introduced in 2016, but before this savers effectively saw a cut in real terms to the amount they could put aside for retirement each year as the limit remained the same while inflation increased.

Steve Cameron, pensions director at Aegon, says: “With wage growth much higher than inflation, this means that in earnings terms, the lifetime allowance is becoming less and less generous, leaving more individuals – and not just particularly high earners – at serious risk of breaching the limit.”

As well as this, while the total Lifetime Allowance rises each year, the annual allowance – the cap on how much you can save into a pension each tax year – does not.

Helen Morrissey, pension specialist at Royal London, explains: “The annual allowance remains frozen at £40,000. This exposes the real lack of joined up thinking when it comes to this ridiculously complex web of tax allowances, and highlight the need for urgent reform.”

Pie in the Sky

While the idea of saving more than £1 million into a pension across a working life may seem pie in the sky to many, it is not just a concern for the uber rich. Indeed, some estimates suggest almost 300,000 people have already surpassed the limit and more than 1 million other workers will breach it by the time they retire.

Indeed, recent figures show that the charges paid by those breaching the allowance in the 2017/18 tax year climbed 28.5% from the previous year to £185 million.

Many employees enjoying generous old-style Defined Benefit pensions could easily find themselves tipping over the allowance, and even those who have saved hard into a Defined Contribution scheme and enjoyed strong returns from the growth of their investments.

Cameron adds: “The effect of pension allowances has been in the spotlight recently, with highly paid professions in the NSH pension scheme refusing extra work or even retiring early to avoid big tax bills associated with their pensions.”

The government has scheduled its Budget for November 6 and is widely expected to announce changes to the pensions system.

Tom Selby, pension analyst at AJ Bell, says: “Pressure for reform of the UK’s unwieldy pension tax system is now growing, with the Office for Tax Simplification the latest to throw its weight behind a fundamental review.

“In particular, the OTS suggests pensions allowances should be split so Defined Benefit scheme costs are controlled by a lifetime allowance, while Defined Contribution members would be subject to an annual allowance.”

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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