Chancellor Rishi Sunak is rumoured to be introducing a ‘stealth tax’ targeting wealthy pensioners.
According to British newspaper The Times, Sunak will announce in next week’s budget that the pension lifetime allowance (LTA) will be frozen for the remainder of the government’s mandate, set to finish in December 2024.
The allowance sets out the limit pension pots can reach before incurring tax charges.
The LTA currently sits at £1,073,100 ($1.5m, €1.2m) and is expected to rise by 0.5% as per September 2020’s Consumer Prices Index (CPI).
This would see it go up by £5,800 in April 2021.
But if Sunak’s rumoured proposals come to pass, thousands of people could unwittingly fall into the taxman’s net and face a 25% charge on any sum exceeding the threshold.
The additional charge would mean about 10,000 people with larger pensions would pay more than £22,000 extra tax by 2024, reports The Times. Resulting in an extra £250m a year for the Treasury.
‘Make up as they go along’
Steven Cameron, pensions director at Aegon, believes the freeze will affect fewer people than the previously rumoured flat rate tax relief of 25% on pension contributions.
Putting the LTA on ice could be easier and quicker to implement, he said; adding that “a move to a flat rate of tax relief might spread tax relief more evenly across earnings bands, but would be far more complex to put in place anytime soon”.
But former pensions minister Steve Webb, who is a partner at LCP, criticised the idea as the government has already taken aim at the lifetime allowance time and again.
“Although pension wealth of more than £1m will seem a huge amount to most people, probably more than a million people of working age can expect to breach that threshold based on current policies.
“What people need in pension planning is certainty. But with the LTA, we have seen the opposite. First it was slashed from £1.8m to £1m, then frozen, then linked to inflation and now frozen again.
“It is almost as if the government doesn’t have a long-term plan but makes it up as they go along.”
‘Inevitable’
But Tom Selby, senior analyst at AJ Bell, believes that the bigger issue is understanding when the LTA increase will be brought back.
“Given the damage wrought by coronavirus to the nation’s collective balance sheet over the past 12 months, it was inevitable all areas of government spending – including retirement saving incentives – would come under the chancellor’s microscope,” he said.
“The decision to scrap lifetime allowance inflation protection for the rest of this parliament is likely less about the modest 0.5% rise in the lifetime allowance, due to kick in from April this year, and more about rises in subsequent years.
“If we see a vaccine-inspired spending boom in the UK this summer, for example, inflation could be pushed northwards – and so too would the lifetime allowance under current legislation. By freezing the LTA as inflation spikes, the chancellor will stealthily drag thousands more people into his tax net.
“Furthermore, the longer the lifetime allowance is kept at its current level, the more of middle Britain will be dragged into its orbit. If the chancellor does freeze the LTA at the budget, savers will be looking for clarity on when the inflation link will be returned so they can continue to save for the future with confidence.”
‘Unfair’ and ‘unjust’ MPAA
In other news, the Association of British Insurers (ABI) has called on the government to scrap the money purchase annual allowance (MPAA) – the limit on contributions a person can make towards their pensions once they access their pots.
Currently, people can save up to £40,000 a year tax-free, but if they enter drawdown, the annual threshold gets curtailed to £4,000, a measure that AJ Bell’s Selby called “unfair” and “unjust”.
“Even before the pandemic struck, slashing someone’s pensions annual allowance by 90% merely for accessing £1 of taxable income from their retirement pot felt grossly unfair,” Selby added. “But during a period of national lockdown, when millions of families are already facing severe income pressure as unemployment rises, it feels particularly unjust.
“Savers withdrew £9.4bn flexibly from their pensions in 2020, while hundreds of thousands will have accessed their retirement fund for the first time during the year. Within those numbers there will inevitably be people who have been forced to dip into their pension as a result of coronavirus.
“Regardless of the circumstances, the MPAA is applied indiscriminately and permanently, leaving people facing an uphill battle to rebuild their retirements. This wrongheaded policy, which also runs counter to increasingly flexible working patterns, must now be rethought as a matter of urgency.
“If this review needs time, in the interim the chancellor should increase the MPAA to £10,000 – the level it was originally introduced at in 2015 – to give savers a little more flexibility.”
