Time to scrap lifetime allowance

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The decision to cut the pensions lifetime allowance to £1m is undoubtedly one of the most savage attacks on saving for many years.

It is a tax on wise investment decisions and on those who begin saving when they are young and so benefit from many years of compound growth.

The lifetime allowance has become an anachronism that should be scrapped. Instead, chancellor George Osborne is using it to squeeze money out of those who have been diligent and have taken good advice on their pensions.

We should not be surprised. The civil servants and politicians who surround him have their final salary pensions valued at 20 times the annual income at retirement.

So they can receive a £50,000-a-year inflation-linked pension without breaching the lifetime allowance.

By contrast, someone with a defined contribution pension might sensibly hope to take £30,000 to £35,000 a year from a £1m pension.

Reform of pensions taxation is inevitable. A single tier of tax relief is likely and would be fairer. But this must be linked with the abolition of the lifetime allowance.

Reform of pensions taxation is inevitable. A single tier of tax relief is likely and would be fairer.

The fairest system might be to introduce a lifetime contribution allowance, thus giving flexibility to the self-employed and others who may not be able to make decent regular contributions early in life. But this would be devilishly difficult to police.

So why not do as Mr Osborne has suggested and make pensions more like Isas, but in just one respect, and that is by limiting them only with an annual contribution allowance? The current carry forward system could be retained to help those who need more flexibility.

Tom McPhail of Hargreaves Lansdown pointed out to me that the lifetime allowance was put in place when the annual allowance was a much more generous £215,000.

Now it is a mere £40,000 – and will soon be much less for higher earners.

In the meantime investors are in a state of flux as government websites have not been updated to reflect the lower £1m limit.

Investors must speculate on how much their pensions will grow over the next five or 10 years or even longer.

The promise to increase the lifetime allowance with inflation is worthless. What is the value of a 1 per cent increase in the allowance when decent investment may add 10 per cent to the value of the pension?

The only fair approach is to scrap the lifetime allowance.

But there is no incentive for politicians or civil servants to do this while their own pensions are merely valued at 20 times their annual income at retirement.