Autumn Statement - PwC on cuts to pensions annual and lifetime allowances
Raj Mody, head of pensions advisory at PwC, said:
“The reductions in both the annual allowance and lifetime allowances completely undermines confidence and trust in pensions. This is a direct blow to the pensions savings culture and could put pressure on the few remaining private sector defined benefit (DB) schemes to close. Employers may also be inclined to lower their contributions to defined contribution (DC) schemes to avoid inadvertently breaching thresholds.
"The trouble with repeated reductions in the allowances is that everyone will suspect further erosion to the system any time the UK economy runs into difficulty and the government needs to raise more tax revenue. Constant changes to pensions means employers and employees are much more likely now to throw in the towel and stick closer to the minimum savings required. Moreover, reducing the lifetime allowance again not only limits people's tax-free cash at retirement but will also add yet more complexity to the running of DB schemes as another form of protection is introduced.
"These changes will hit DC savers harder, which seems unfair. Someone saving the maximum of the £40,000 annual allowance into a DB scheme would receive a pension of £2,500 a year, but a DC saver investing the same amount, may only be able to secure a pension of around two thirds of that amount, because of current annuity prices. The cut in annual allowance means savers in DC schemes, who want to contribute the maximum amount, could be losing out on £300 of pension payments a year. It is unhelpful to reduce the allowance thresholds just at the time when the Government is trying to encourage people into DC pension schemes through auto-enrolment.
“The measure is aimed at targeting the wealthy, but could in fact hit middle-income workers or long-servers in final salary schemes. People who deliberately plan to increase pension savings later in life, rather than save a little each year, will be unfairly penalised and restricted in their retirement planning.
“The cut in annual allowance is likely to accelerate the rate of closure of defined benefit schemes as they become even more complex and expensive to run. A number of our FTSE100 and multinational clients have already indicated that it would be untenable to continue to offer DB schemes with the consistently changing constraints on tax relief.
“These further changes and government intervention on pensions demonstrates why defined ambition arrangements are unlikely to get off the ground. Employers are very wary of future governments interfering with employers' pension arrangements, and have good reason to be so. It has happened in the past and it is happening again now.”
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