The pension lifetime allowance puts a cap on how much someone can accrue in their pension tax efficiently. Skandia argues that this cap penalises good investment performance and only serves as a barrier to pension savings.
It says this cap should be scrapped, especially as there is already a cap on the amount of money someone is able to pay into their pension each year.
The £1.5m cap may seem an extremely high limit to reach and people may not think it will impact them. However, data produced by Skandia shows this cap could have a detrimental impact on ordinary, hard working, prudent savers, and not just the wealthy.
For example, if someone starts contributing to their pension at age 25, and intends to retire age 65, that's 40 years worth of contributions. If they invest £509 gross, which equates to just £363 net for a higher rate tax payer, their pension savings could breach the current £1.5m lifetime allowance threshold by the time they reach retirement. This level of contribution is assumed to rise by 3% a year, and an investment growth rate of 7% is achieved. If growth is even higher as a result of excellent investment choices and a well managed portfolio, then the investor will be penalised with a tax charge of up to 55% on any excess above the £1.5m.
The lifetime allowance was recently reduced from £1.8m down to £1.5m which was the original cap that applied 6 years ago. The government has not announced any intention to review this limit, or increase it in line with inflation. The £1.5m cap will impact more and more people over time, especially if no adjustment is made for inflation. In 40 years time for example, the threshold could be the equivalent of £460,000 in today's money. At this level, the cap will become a real barrier for a considerable number of savers.
Adrian Walker, Skandia's pension expert, comments:
"The current annual allowance, set at £50,000, controls the amount of tax relief the Government is prepared to give on pension savings. With this control in place, it is hard to see what rationale there is for a lifetime allowance. The lifetime allowance effectively caps good investment performance and will penalise those who have managed their investments well.
"Young people are being told to take responsibility for their future and start saving early towards retirement. If someone is successful in their career, and they are prudent in their savings, this cap is clearly going to penalise them. At a time when the government should be doing more to attract people towards saving for their retirement, they should look to remove barriers which could act as a detriment. "
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