While the annual allowance is relevant for both self-invested personal pensions (Sipps) and SSASs, the latter probably suffers most. SSAS payments are almost always from an employer seeking to maximise contributions, whereas most Sipp payments are personal. When the original annual allowance was introduced, it was significantly higher than necessary. But for any directors whose company was making higher levels of contribution in years of profit, the lifetime allowance would soon be reached, effectively limiting the amount of tax relief being earned on the individual’s pension accruals.
The reduction in annual allowance changes this significantly. While a number of people will already have accumulated pension funds towards the limit of their lifetime allowance, an individual setting out on the pension ladder today would have to contribute £50,000 pa for 20 years to accumulate the lifetime allowance of £1.5m, assuming a 4 per cent pa rate of return.
With reductions in the annual and lifetime allowance, an individual commencing pension saving in 2014 would have to pay £40,000 pa for 21 years to accumulate the revised lifetime allowance of £1.25m. It may be argued that we are approaching an era where having both an annual allowance and a lifetime allowance is irrelevant.
Possibly the greatest clamour prior to the Autumn Statement was about the significant reduction in the maximum drawdown that could be taken from pension arrangements. This was due to several factors: a reduction in yields, largely the result of quantitative easing; changes to the Government Actuary’s Department (Gad) rates accounting for greater longevity; a reduction from 120 per cent of Gad rates to 100 per cent; and poor returns on pension funds from the previous few years.
This meant pensioners who had started drawdown in, or shortly after, 2006 and had been taking the maximum income, now faced reductions in their pension income levels of around 50 per cent. New pensioners also faced low levels. Graph 1 illustrates the impact for a 60-year-old commencing drawdown in April 2006 through to April 2012 for a £100,000 fund, showing the maximum dropped from approximately £7,500 pa to £5,000 pa. While the recent proposal to reinstate the 120 per cent rate will go some way towards improving the drawdown situation, it will not reverse the significant reduction that has occurred in the past six years.
Longevity continues to improve and, as the Gad rates are supposed to reflect annuity rates, there is likely to be a further reduction due to gender equality when insurance companies finally determine how to show this in their annuity rates. Strangely, while politicians express concern that they do not wish individuals’ pension funds to reduce too rapidly so they become dependent on the state – although, in reality, the drawdown formula virtually precludes any such situation happening – it would arguably be in the chancellor’s best interests to keep pension income high in the short term to ensure a higher income tax take, which must surely be beneficial for the exchequer. Artificially reducing retirees’ income is not good, either for the individual or the Treasury.