Most readers of Money Management will agree, I’m sure, that politics – and politicians – should be taken out of pensions altogether.
Indeed, it’s fair to say that one of the biggest problems affecting the pensions industry over the years has been the endless tinkering of successive governments.
You can bet your bottom dollar that the moment a new government comes into power, the system changes again (after all, all new governments need to be seen to be doing something and pensions are a good place to make a stand).
Unfortunately, the result of all this tinkering is that there is never any joined-up thinking. This leaves consumers, businesses and even those in the industry confused.
It doesn’t help, of course, that the politicians dictating – or wishing to dictate – the direction of the pensions industry are too often lightweight and in it for themselves.
The latest example of hare-brained thinking by politicians who see big numbers without the bigger picture emerged in the recent Liberal Democrats paper, ‘Fairer taxes’, where the party outlined its position on taxation for the autumn conference.
Here Clegg, Cable et al set out their views on pension taxation, specifically their proposal to restrict the lifetime allowance to £1m. They argue in the paper that “a £1m lifetime allowance would still be a generous regime”.
I’d beg to differ. Although there’s no doubt that people with a pension pot of £1m will be infinitely more comfortable than the majority of pensioners, many higher earners are going to get taxed to death if the lifetime allowance is reduced further.
People would basically be severely penalised for doing the right thing and saving.
Massive tax charges
We recently crunched some numbers and found that many people in their 30s and 40s with decent, if not huge, pension pots are likely to exceed the lifetime allowance of £1.25m without even making any further contributions, triggering a massive tax charge.
For example, a person aged 40 with a pension pot of £500,000 yielding 5 per cent per annum and retiring at 65 would see their end fund value – even without any further contributions – exceed the current lifetime allowance by £437,000. This would result in a tax charge of £240,350.
If the same person were to contribute £3,000 per annum gross, with the same 5 per cent yield and again retire at 65, the total pension pot would be £1,833,000 – £583,000 above the current lifetime allowance, resulting in a tax charge of £320,650.
Our research also revealed that a 30-year-old with a pension of £250,000 would exceed the lifetime allowance by £118,000 without making any extra contributions. This would generate a tax charge of just under £65,000. Again, this size of pension pot is way above the average but it is not uncommon among higher earners.
In both these examples, of course, the tax charge would be considerably more were the lifetime allowance reduced to £1m, as the Lib Dems, in their bid for a fairer society, propose.