Andrea Leadsom MP, economic secretary to the Treasury, has defended the cut to the lifetime allowance unveiled in yesterday’s Budget.
In the last Budget of the current government, George Osborne announced plans to slash the lifetime allowance for pensions tax relief from £1.25m to £1m from April 2016 in order to increase relief costs.
From 2018, the lifetime allowance will be indexed and linked to the retail price index (RPI), so those building pensions don’t see their pot eroded over time. The decision to restrict lifetime allowance is expected to help the government save £600m a year, Mr. Osborne said.
At a press briefing following the Budget speech, Ms Leadsom MP said the decision is a fair reflection of the government’s need to continue with the consolidation.
“The median pension pot is £78,000 and only about 4 per cent of people have more than £1m. It is quite small,” said Ms. Leadsom, adding, “we also relaxed Isas and made changes to savings freedom.”
But providers have dismissed the move as disappointing and short-termist.
Steven Cameron, regulatory strategy director at Aegon, said, “A £1m pension pot may seem huge, but with improvements in health and life expectancy, people who retire at 60 may need to use their pension income to cover their costs for 30 years or more.
“If you want your pension to continue to your partner and rise with inflation, £1m will buy you less than £30k a year.”
A number of critics have also pointed out that these rules could disincentivise young workers since they will face a major cap on their saving. But Ms. Leadsom said the changes will help young people.
“It is extremely advantageous to young people – they are more likely to save now. We also have Help to Buy Isas in place. This means they can think about saving for a new home or for their children,” she said.
During his Budget speech, the chancellor announced a Help to Buy Isa which would see the government contribute an extra £50 to an approved tax-sheltered account for every £200 people save towards their first home. The minimum bonus is £400 per person and the maximum is £3,000, available on home purchases of up to £450,000 in London and up to £250,000 outside London.
“You need to be over 16 and a first-time buyer,” said Ms. Leadsom, explaining the prerequisite for the product.
Some critics have pointed out not many first time buyers will be able to make use of the vehicles because of rising prices, and have questioned whether this product could push prices any further.
“This will not push up property prices. We haven’t seen any adjustment in house prices because of this product in our forecast. This will help first time buyers reach the housing ladder,” said Ms. Leadsom.
