Chris Noon, Partner, Hymans Robertson says: “Freezing the Pensions Lifetime Allowance until 2026 is quite simply a kneejerk reaction by the Chancellor for short term financial gain and comes just 3-years after the Government committed to increase it in line with inflation. It is bitterly disappointing to see him renege on this promise so soon and viewing those impacted by this change in pensions tax policy as necessary collateral damage.
“We remain worried that the Treasury has far too short a memory; it has spent years tinkering at the edges of pension taxation policy and should have learned that decisions such as this can lead to damaging unintended consequences. Back in 2016 another kneejerk introduction was the tapered annual allowance which eventually led to senior doctors, amongst other affected groups, refusing to do additional shifts. These 2020 pandemic heroes are likely to be massively impacted by this freeze. This hasty move to reap short term financial benefit for the government could be detrimental for those who we valued most during Covid-19. For the level of political fallout that is likely to emerge, it feels like it the government really shouldn’t have made this decision.
“The taxation of pensions needs a fundamental review and the Treasury must resist this continued temptation to simply ‘tinker’. The inequities that remain in place must be addressed, alongside the unforeseen financial implications of Covid-19. Rather than penalise our pandemic heroes with rushed policy changes, they should work with the DWP and pensions community to develop.”
Mark Pemberthy, Head of DC & Wealth at Buck, comments: “The freeze on the lifetime allowance announced by the Chancellor will affect relatively few people in the short term and will be an uncontroversial way to help begin tackling the UK’s debt in the eyes of most of the public. However, if the freeze continues then over time it will have a bigger impact, particularly on those who are building up defined benefit pensions. Long-serving public sector workers earning higher levels of income are most likely to be caught, including doctors. So, the very same doctors who have spent the last year battling Covid in NHS hospitals will also be among those people most vulnerable to this policy change over time.
“This latest freeze also highlights the complicated history of the lifetime allowance, which was originally introduced in 2006 in an attempt at pension simplification. The allowance was introduced at £1.6m and climbed to £1.8m in 2012 before being regularly reduced since then. If it had increased in line with inflation since 2012 it would be around £2.18m, almost double what it stands at today.”
Commenting on the freeze to the lifetime allowance in today’s Budget, James Riley, President of the Society of Pension Professionals and Partner at Isio, said: “Freezing the lifetime allowance seems a politically easy decision. Who disagrees that the wealthiest pay their fair share? And it costs people nothing now. The trouble is it exacerbates the current DB / DC inequalities. In the DB world, a lifetime allowance of £1 million equates to a sizeable pension in excess of £50,000 pa. However, in a DC world, and based on current annuity rates, £1 million buys a pension of just £22,500 per annum i.e. less than half of what DB members receive. This effectively penalises DC members with considerably more modest retirement incomes. With DC members typically younger than those in DB schemes, this is a further financial hit to the younger generations who are already the financially hardest hit by the pandemic.”
Tim Middleton, Director of Policy at the Pensions Management Institute, said: “As with the first rule of medicine to do no harm, we are pleased that the Chancellor has not done anything majorly detrimental to workplace pension saving in today’s Budget, but freezing the Lifetime Allowance is disappointing.
“When the Lifetime Allowance (LTA) was introduced 15 years ago, the industry was relieved to see a simplicity from the harmonisation of different pre-existing tax regimes. Since that time, however, we have experienced a number of downward adjustments which collectively have resulted in administrative complications and confusion for scheme members. We are concerned that today’s measure will serve as a further disincentive for workplace pension saving which can only have a negative impact for society as a whole.”
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