Chancellor George Osborne’s proposal to reduce the lifetime allowance to £1.2 million from 2014 means that many more pension savers could be heading towards a 55 per cent tax bill, Buck Consultants warned in a statement today.

Last year, Osborne announced in his Autumn Statement that the standard lifetime allowance will be reduced from £1.8 million to £1.25 million and that the annual allowance will be lowered to £40,000 for tax year 2014-15 onwards.

However Buck Consultants said the cutbacks could make it “extremely difficult” to plan for the future. It added that having taken inflation increases in payment into consideration, those aged 65 and who benefit from 50% of their spouse’s pension, could only buy a maximum income of £41,000 per annum from their pension.

It said: “The key issue is the inability to plan, because changes to the lifetime allowance have not been accompanied by any statement of future policy intention. The question is: how far below the figure of £1.25 million do individuals need to be before they run the risk of an excess at retirement?”

The consultants highlighted three areas in which the allowance could be exceeded and how the impact on investment returns and future contributions could lead to a 55 per cent tax charge.

It said that for someone in their 50s – 15 years from potential retirement – a fairly modest 6% per annum return would multiply their fund value by 240%. This means that a current value of £500,000 could come close to the limit based on a modest return with no further contributions. However Buck Consultants highlighted that future investment growth could be “anything and the variance could be enormous”.

It also warned that even in situations where there were modest future contributions at a 6% per annum return over the 15 years, depending on earnings and contribution percentages, a fund today of £225,000 would reach the limit.

It highlighted that those in their 40s with 20 to 25 years until retirement and who currently have smaller fund sizes could also potentially face issues. Buck said the additional five to 10 years of investment returns mean a current fund size of £300,000 with no additional contributions or £150,000 plus future contributions could hit the limit.

Buck Consultants senior actuary corporate consulting Colin Richardson commented: “Our calculations show that people do not have to have a huge pension fund for the change in lifetime allowance to have a destructive impact. Whilst most of the focus since the Autumn Statement has been on the new annual allowance of £40,000, we believe the reduction in the lifetime allowance is actually a timebomb. After all, you can calculate if you are likely to go over the annual allowance whereas it’s much more difficult to predict whether your pension pot will infringe the lifetime allowance.”

He added: “These figures demonstrate how easy it is for someone who is making solid – but not exceptional – pension contributions of, say, £10,000 over 30 years to exceed this limit, if starting from no fund at all. Employers and employees need to consider whether employer pension provision needs to be replaced by an alternative type of remuneration if calculations show that an individual risks an excess.

“There is also a problem that the auto-enrolment legislation does not take account of the lifetime allowance. An employee with a lifetime allowance issue, who is subject to auto-enrolment, will still have to be auto-enrolled by their employer. Unless they opt-out within a month they will be saving into a pension expecting to lose 55 per cent of it. Not only does this involve extra administration, it also means that the new pension is ineffective if the individual does not realise that he or she needs to opt out.”

Share Story: