The UK Economy News

This is according to Old Mutual's Skandia group who say the new reduced lifetime allowance of £1.25m could impact on ordinary hard working, prudent savers, and not just the wealthy.



                     

Someone aged 25, starting to invest in a pension with the intention of retiring at age 65, will have 40 years worth of potential contributions that can be paid. If they invest £427 gross each month into their pension, so £256.20 net for a higher rate tax payer (or £341.60 for a basic rate tax payer), their pension savings could breach the £1.25m lifetime allowance by the time they retire.  This assumes 3% a year growth in contributions, and an annual investment growth rate of 7%.

If growth is even higher as a result of excellent investment choices and a well managed portfolio, then the investor will be penalised with a tax charge of up to 55% on any excess above the £1.25m that is taken as a lump sum.

Under the current lifetime allowance of £1.5m, someone would need to invest £511.74 gross, £307 net, on the same basis as above to breach the limit . So the situation is getting worse, not better and, as inflation kicks in, the number of people impacted by this barrier could become substantial.

Customers, together with their financial advisers, now need to consider the impact this will have on them, and whether they need to apply for the new fixed protection option that will be available to protect their pension savings if they could reach the £1.5m limit.

Adrian Walker, Skandia’s pension expert, comments:

“The reduction in the annual allowance down to £40,000 will control the amount of money flowing into pensions, and the amount of tax relief given, so it is hard to see the rationale for limiting the investment growth of a pension. The lifetime allowance effectively caps good investment performance and penalises those who save and managed their investments well.

“The government should be doing more to encourage young people to take responsibility for their future and to start saving early towards retirement. Today’s announcement may be seen by many as just another barrier that could have a detrimental impact on the view of ordinary, hardworking savers towards using pensions to save for their retirement.”