How do you solve a problem like the LTA?

Pete Glancy

2. Had the saver been able to benefit from continued investment growth at 8 per cent a year (and assuming no further contributions or tax relief on contributions) the pot at age 60 would be £2.16m. Once again, assuming they draw down 4 per cent of their pot per annum, this gives an annual income of £82,000. The retiree would then pay a higher rate of tax on twice as much money, to the benefit of The Exchequer and society.  The retiree would have the capacity to spend twice as much on goods and services on which VAT is paid.  And those selling the goods and services would receive twice as much income on which a combination of personal tax and corporation tax is paid.          

The assets in our pension system are an important national asset, supporting investment in British businesses, housing and infrastructure.

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The Lifetime Allowance, however, means that an increasing proportion of pension pots are required to become economically unproductive, as savers who reach the £1m threshold have to switch investments away from anything that might offer them a return. 

For those who breach the Lifetime Allowance the situation is more challenging. Maybe the German government could come to the rescue with their two-year Bund currently offering a yield of -0.74 per cent.

 A theoretical consequence could therefore be that UK savers need to take money out of assets which invest in British industry and infrastructure and give these to Germany to bank roll their economy instead. It’s a prospect that doesn’t seem all that patriotic.      

While the Lifetime Allowance is problematic, it was introduced as part of a suite of measures to target scarce resources towards those who have the greatest need.

Removing the Lifetime Allowance in isolation could see more tax relief benefiting the most affluent than is currently the case and this would be unpopular with the electorate and be generally unfair from a social justice perspective.

If and when the government again considers our system of pension taxation more broadly, removing this particular ingredient in conjunction with other appropriate measures could result in a system which is more easily promoted and understood by the public and remove undesirable and irrational economic consequences from the system.

Pete Glancy, head of industry development, Scottish Widows