LTA! - Come on in your time is up

Rarely has such a concept become an anachronism so quickly. The Lifetime Allowance was introduced at £1.5m in 2006 and rose to the heady heights of £1.8m by 2010. It has since been pegged back and back to its new low of £1.25m. However, it is time for it to go. I am not living in complete naivety and understand that when it bites it is a revenue earner for the Treasury but a tax system should be fair and people should not penalised for saving into a pension.

 

Reasons why it should go:

 

1.   The Annual Allowance (the “input test” little brother to the Lifetime Allowance “output test”) is also at an all time low of £40,000. This level already restricts the tax efficient accrual in DB schemes (actually disproportionately afflicting those in the public sector) and also restricts the levels that the wealthy can attract tax relief therefore a second tax charge via the LTA is not required.

 

2.   The next government (however it is constructed) will be sure to introduce a flat rate of tax relief for pension contributions. The purpose of the LTA tax charge is to reclaim excessive tax relief during the accumulation phase if tax relief is say 30% there is no longer a need to recover excess tax relief.

 

3.   The unfairness in the system means that DC members are actually hit the hardest when taking benefits as there is a very good argument that DB benefits are given an unfair value. For example a £40k pa annuity would cost c£1.2m against a £40k pa DB pension worth (for LTA purposes) £800k. The LTA system is biased in favour of Public Sector schemes.

 

4.   It can be pretty complicated – protections and restrictions make it very difficult for joe public to understand – if we want to simplify the system as much as possible removing the Lifetime Allowance helps us move towards that goal.

 

5.   It stifles prudent saving into a pension and good investment performance. Having an upper limit, as well as an income limit, has forced individuals to either leave a scheme or begrudge the investment returns that takes them above their given threshold and attract tax charges.

 

Potential Issues if it is removed:

 

1.   It would be seen as a tax-cut for fat cats – albeit old fat cats. This is presentation matter and while some will regard it as such provided the “input test” is as punitive as it is now this already provides the brakes on wanton tax avoidance for younger fat-cats.

 

2.   What would you do to those that opted out of a scheme to protect what they’d earned, they might feel hard done by for the lost years of pension saving but they may be able to restart and they should benefit with carry forward for the lost years, a simple solution for those affected.

 

So as we approach the exciting time of the party conferences and the “pre-manifesto manifestos” shadow pensions ministers (and the real one) should take a progressive view and pledge to remove the pointless Lifetime Allowance.

 

David Brooks

Pensions Consultant

 

Telephone: +44 (0)20 7893 3456

Email:  contactus [@] broadstoneltd.co.uk