Personal PensionFeb 27 2015

Labour vows pension tax relief double whammy

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Labour vows pension tax relief double whammy

The Labour Party has stated that if elected they would restrict the lifetime allowance to £1m and the annual allowance to £30,000, in a double whammy designed to fund a pledge to reduce tuition fees for university students.

Opposition leader Ed Miliband confirmed the plans in addition to those previously announced on restricting pension tax relief to 20 per cent for additional rate taxpayers.

According to Hargreaves Lansdown, restricting the lifetime allowance to £1m would mean that a 65-year old looking to buy a secure inflation linked income for themselves and their spouse would be restricted to a maximum income of £27,000 a year, based on current joint annuity rates.

Defined benefit members would still be able to build up a secure pension of up to £50,000 a year the firm added.

Tom McPhail, head of pensions research at Hargreaves Lansdown, pointed out that if an individual reduced their annual allowance down to £30,000, any kind of lifetime allowance would become redundant.

In terms of the annual allowance, someone starting a pension at age 40 paying the maximum of £30,000 a year would not even be able to reach the lifetime allowance. Their projected pension fund at age 67 would be only just over £900,000, even after 27 years of saving.

As for restricting tax relief, Mr McPhail said this would mean a loss of tax relief for those earning over £150,000.

“No one is going to lose too much sleep for these few higher earners but the rules necessary to restrict their tax relief would make the pensions system more complicated for everyone,” he stated.

“These measures aren’t about targeting the super-rich, they would penalise responsible middle income workers who want to provide for their retirement and make sure they aren’t a burden on the state.”

Chris Noon, partner at Hymans Robertson, said that for any future government that is looking to raise immediate revenue, limiting pension tax-relief is an easy target, pointing out that while those earning over £150,000 are likely to be targeted by all parties over the coming weeks.

“While a policy that delivers a quick win for any government’s balance sheet might seem lucrative, there is unlikely to be any long term gain for society or the economy. With the looming savings gap and substantial reductions in State Pension, the idea of a flat rate tax relief is a more sensible route to pursue.”

On the proposed changes to lifetime allowance and annual allowance, Mr Noon pointed out that yesterday’s Office for National Statistics figures pointed towards record numbers enrolled in work place pensions, with the tide moving towards defined contribution schemes..

“But as things stand currently, accrual rates on defined benefit pensions are far more generous, meaning members of these schemes can build bigger pension pots before being penalised by tax; addressing this issue would be a far better area of focus.”

peter.walker@ft.com