“With ever increasing life expectancies, another cut in the lifetime allowance will make it difficult for many members of defined contribution schemes, who would not consider themselves high earners, to save enough to maintain their living standards through to the end of their retirement.
“The lifetime allowance has been slashed from £1.8 million to £1.25 million over the last three years. Today we’ve seen it cut further to £1m. The Chancellor says that it will affect fewer than 4% of those approaching retirement. We think 15-20% could be impacted by this ultimately.
“This is a policy that could act as a disincentive to doctors, dentists and secondary school head teachers saving into pensions. We would expect mid-senior managers earning £90,000 plus to build up a pension pot of over £1m over their lifetime. £1m sounds like a lot of money, but it delivers an annual income of around £30,000 per annum in a DC scheme.
“An interesting point to note is that while a £1m tax free pension pot will deliver a £30,000 DC pension it will give a DB pensioner an income of £50,000 in retirement. In that context, changing the annual allowance hits DC pension savers harder than DB. The reasons for this are historic. The terms at which a DB pension pot are converted into an income were set over a decade ago at 20:1. In contrast, DC pensioner’s pots are converted at the market rate which is closer to 30:1. As a consequence, this policy disproportionately penalises DC savers.
“While indexing the annual allowance from 2018 will to some degree help prevent this policy impacting the masses, the CPI increases that will come into effect in 3 years won’t be enough to offset the number and scale of cuts we’ve seen in recent years.
“The pace of change in pensions has been unrelenting. Pension saving is about taking a long-term view. A period of stability is needed to allow individuals to better plan for their retirement.”
|
