In the office to day we have been exploring a client’s situation where his pension is likely to be seriously overfunded when he gets to his likely retirement age.
Unless you are actively involved in the financial services field it is unlikely that you are aware that our political masters have decided that it is not enough to restrict the amount you can pay into a pension scheme year by year, but that your total accumulated funds are restricted as well. This restriction, the Lifetime Allowance, is being reduced from £1.25Million to £1Million in April 2016.
At first thought, £1Million sounds like a lot, but remember the current conversion rate from capital to guaranteed income, (an annuity), is about 5% at age 65, so government is telling us all that we cannot have tax breaks on a fixed pension worth any more than £50,000 per annum. Remember that this is the value at retirement and will be eroded by inflation over time.
According to an article in Citywire, Steve Webb, the previous pensions minister said that the annual and lifetime allowances were cut in 2010 as the preceding Labour government had already set aside the tax relief savings for other projects, so the incoming government had their hands tied.
From a classical economics point of view I would suggest that this is not in our collective best interests. So far as I can tell, the only people not exposed to this form of madness are politicians with their special defined benefits scheme, which hardly seems fair.
Tax relief is given to activities that collectively is seen as a benefit to society as a whole. Saving for a pension is seen as beneficial as it keeps someone from relying on the public purse for relief and it provides a pool of very long term capital that can be applied to developing the sustainable economic capacity of the country.
I appreciate that a starting pension of £50,000 per annum takes an individual out of any danger of claiming from the public purse, but that pool of long term capital has significant benefit to United Kingdom plc. The banking and finance system needs assets to lend and here is a voluntary pool of assets provided by people who are economically active.
We need a period of stability on pensions again. If the social norms of society require that the majority of workers do not die in harness, then we need an adequate pension system. If the economically active and thrifty are penalised by arbitrary changes and excessive marginal rates of tax, then they will remove themselves from the rat race by one means or another. We now have a perverse incentive where people with a large defined benefit pot will be best served by taking their guaranteed pensions as soon as they can. Is it sensible for a society to encourage their most successful members to leave, (economically) early?
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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.