The other day I noted that someone had started a discussion on a Linkedin group with a post that went something like ‘will pensions exist in 50 years time?’ and that’s before this latest announcement that the Lifetime Allowance (LTA) is dropping (again!), this time to £1.25m and that the Annual Allowance is also reducing even further to £40,000 (which originally stood at £225,000). It’s quite depressing to think that we have clearly reached a point where many question the longevity of pensions and we don’t say that just because we are a pension provider.
Is there not something troubling (to say the least) about a society that targets prudent savers and owners of SMEs with wave after wave of attack whilst all but letting the architects of the mess we are in off all but scot free?
The LTA and Annual Allowance are perfect examples. The LTA being a threshold that came into existence on A Day and whilst at £1.8m was an irrelevance to most pension savers, still left many people assuming this not unreasonable ceiling would be raised each year. This should not have been a naïve assumption given that the cost of living is rarely on a downward trend, but it has proved to be wrong.
The Annual Allowance being a similarly punitive measure that drastically capped how much anyone could pay into their pension scheme each year before tax fell due on that contribution. I don’t suspect that when introduced, anyone expected this to also travel in the wrong direction let alone quite so rapidly and in such large steps.
The first warning shots were the levelling off of the LTA at £1.8m closely followed by a drop to £1.5m. That’s an instant 55% tax bill due on £300,000 (£165,000) unless those caught out applied for protection, which in itself is a complicated, time consuming and expensive process for Clients, Advisers and Providers.
The Annual Allowance closed the tax saving gap from the other direction by slashing the total tax free contribution permissible per year by 450% from £225,000 to £50,000. This has now gone down again (or will be for the 2014-15 tax year) to £40,000.
This latest round of announcements from HMRC is just the next logical (or illogical?) step to further punish investors and make a gloomy situation even more depressing. The latest reductions will quite obviously catch a new band of people out and trigger a new wave of protection activity whilst casting further doubt on the long term legitimacy of pensions as a tax free place to save for retirement and adding to the woes of business owners.
This is all (in our opinion) dangerous short term thinking given that we seem to be just as much in the mire now as two years ago and coping with the realities of a Triple Dip Recession. This has altered, probably permanently so, the landscape for all creeds of investor, from the humble saver, to the company director to the entrepreneur. None are safe from the squeeze to collect more revenue and cut off lines of credit. We all know the country is skint but it is deeply unfair and inappropriate to make pensions foot the bill when if they are used properly they could be an important part of the solution. And what about the enormous gulf between pension savings and costs of sustaining a decent quality of life in one’s retirement years?
However, clouds always have silver linings and this is actually an ideal opportunity for advisers to get in touch with their clients to help them understand how this latest round of changes affects them. As always, we welcome any client or adviser that could use a bit of help to get in touch and take advantage of our expertise while there is still lots of time to make any appropriate changes before the new legislation comes into effect.