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

Jeff Prestridge

Jeff Prestridge

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.

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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