Retirement savers have in the last decade been hit by a two thirds cut in the maximum pension they can purchase while staying within HMRC tax relief limits, according to analysis by Royal London.
Its report also flags an increase in complexity due to changes in tax limits, citing that around 100,000 people are now covered by transitional protections associated with the different reductions in lifetime limits.
Royal London’s director of policy, Steve Webb said: “With each cut the system has become more and more complex, and many tens of thousands of people are now actively trying to avoid saving too much into a pension.”
In its paper, Pension Tax Relief: Time to end the Salami Slicing, Royal London looks at how cuts in the lifetime allowance for pension tax relief have coincided with falling annuity rates to cut the size of the pension that can be bought within HMRC limits.
The LTA was cut in 2012, 2014 and 2016, from a peak of £1.8m to £1m now. Annuity rates have fallen by around one third in the last decade.
A minority of people currently have pension pots at the million pound level.
But the Royal London report pointed out if the limit is held constant in real terms - the government’s current policy - this limit will affect not just the highest earners.
Royal London calculated that in 2016/17, with an annuity rate of 4.54 per cent a £1m pot would buy an annual pension of £45,400.
In 2007/08, an annuity rate of 7.36 per cent applied to the LTA would have generated a pension of £117,760.
Taking account of inflation since 2007/08, this represents a real terms cut of over two thirds.
For those looking to use their pot to buy a pension with inflation protection and something for a surviving spouse, the situation is more restrictive.
A £1m pension pot would buy a pension starting at £27,100 if it rose by 3 per cent a year and provided a 50 per cent survivor’s pension.
The starting pension would be £20,860 if the pension was fully linked to the retail prices index and provided a two thirds survivors pension.
Elsewhere the report pointed out that each time the LTA is reduced, HMRC allows individuals to apply for complex forms of transitional protection, and it is estimated that the numbers covered have now reached around 100,000.
Each of these forms of transitional protection has its own system of rules, adding to the cost to individuals and to the taxpayer of administering the system.
Mr Webb added: “The salami-slicing has to stop. The best thing the chancellor could do in the Autumn Statement would be to announce that he is leaving pension tax limits unchanged for the rest of this Parliament.
“Saving for a pension should be a long-term business, and constant tinkering with tax limits in pursuit of short-term revenue gains creates uncertainty for savers and makes saving in a pension a less attractive option.”
laura.miller@ft.com
