Many will be caught out by ‘backdoor tax’ on pensions

For just over an hour or two, I marvelled as characters from my youthful past strutted past me to address matters of national importance, or to participate in a little light lunch.

They included the likes of Baroness Williams of Crosby, the upright military man that is Lord Ashdown, the indomitable and formidable Baroness Trumpington and Lord Donoughue who kindly took time out to tell me he liked my newspaper’s cynical stance on the causes of climate change (naturally, I blushed).

I even bumped into Baroness Wheatcroft who was a City journalist with The Mail on Sunday when I joined the paper 20 years ago. How some careers soar while others stagnate? Indeed, how time flies. It only seems yesterday that Patience was berating me for some error I had made in my personal finance pages.

Back to Lord Lee. He is an ex-Conservative minister from the Thatcher years (nothing shameful in that). He then defected to the Liberal Democrats in 2001, causing one Conservative wag at the time to ask ‘Who?’ when challenged on the implications of his defection. He was made a life peer in 2006.

Interested though I am in politics – and a glutton for the odd shoal of sea bass – my real reason for lunch with John Lee was to meet one of the country’s few declared Isa ‘millionaires’.

Most Isa ‘millionaires’ remain in the closet so it is brilliant when one of them ‘outs’ voluntarily.

I listened starry eyed as he unfolded his secret to successful investment – a combination of diligent research and patience. He likes to hone in on cash-generating businesses – preferably family controlled ones – that pay dividends and consistently deliver profits. He revealed the current value of his Isa but my lips are sealed. All I will say is that it is now worth a lot more than £1m.

HMRC claims that only 30,000 people will initially be caught by the reduction in lifetime allowance, but that this figure will rise to 360,000 by 2030

I won’t bore you any more with lunch details other than to say Lord Lee was tucking into his lunch only 24 hours before going into hospital to have a slice of his colon removed.

I did leave the Lords, though, thinking that Lord Lee is a lone political voice when it comes to ‘bigging up’ savings.

If only Conservative and Liberal Democrat ministers shared his support of the value of long-term saving. Indeed, how ironic it is that Lord Lee belongs to a political party that is currently advocating yet more tax raids on pensions with its wish to see the lifetime allowance reduced further to £1m. This is a proposal made before the latest reduction – from £1.5m to £1.25m – comes into effect on 6 April along with the reduction in the maximum annual contribution level from £50,000 to £40,000.

So far, only one politician, David Davis, Conservative MP for Haltemprice and Howden, has contacted me to register his disquiet over this back door taxation of pensions.

Maybe this is because pensions favour the well off. The majority of tax breaks go to higher rate taxpayers despite the fact that 50 per cent of pension contributions are made by basic rate taxpayers. Yet the extent of the tax raid cannot be underestimated. HM Revenue & Customs claims that only 30,000 people will initially be caught by the reduction in lifetime allowance, but that this figure will rise to 360,000 by 2030.

By the time we get to tax year 2017/2018, the reduction in lifetime allowance and contribution levels will have resulted in a yearly ‘saving’ for the government of £1.125bn.

Most people have no idea that this reduction in the lifetime allowance is about to be sprung on the nation. Those that do probably think it will have no impact on them whatsoever. Yet, for people with sizeable benefits built up in final salary schemes, they could well be caught out.

If someone in a defined benefit scheme takes his pension before 6 April, his benefits will be tested against the £1.5m lifetime allowance – broadly equivalent to an annual pension of £56,250 plus tax-free cash. Post 6 April, an annual pension of £46,875 will touch up against the reduced allowance of £1.25m.

I am in the AJ Bell camp when it comes to the lifetime allowance – it should be scrapped. But I won’t be betting on that happening.

As far as you good financial advisers are concerned, you have a job to do – and that is to explain to clients the likely impact of the lifetime allowance reduction on their savings and to secure them ‘fixed protection’ before the 5 April deadline if it is in their best interests.

All that remains is for me to wish the Isa millionaire a speedy recovery.

Jeff Prestridge is personal finance editor of the Mail on Sunday