1. It forces savers to ‘invest to lose’
Our ageing society is just one reason why almost everyone agrees we have to do more to self-provide for our old age. Yet here is a policy that forces people to limit the growth of their own savings.
Even if she pays no more money in, investors such as Ms Tenison are having to switch from higher-growth assets such as shares to cash in order to limit their portfolio’s future growth.
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2. It forces public servants to retire early
The idiocy of the lifetime allowance is that where it applies to our highest-paid civil servants, such as NHS consultants, it operates as an incentive for many to retire earlier than they would otherwise have chosen to. Why? Because the limit works like a sudden increase in tax.
• 'Should I retire at 55 because of my £1.25m NHS pension?'
3. It hits the young hardest
Whatever happens, provision of state pension and other benefits for older people looks set to decline, so younger generations have a case for preferential treatment – not the reverse. Yet the lifetime allowance means that those who invest for the longest periods (ie those who start saving soonest) are more likely to be penalised than older savers who stash bigger sums closer to their retirement.
With the lifetime allowance set at £1m, high earners in their 30s would understandably think of a pension as distinctly limited – and that’s before the Chancellor does anything to cut back the relief on contributions (see page 3).
People have talked about the death of pensions for years: an arbitrary lifetime limit is the heaviest blow.
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4. It unfairly favours public sector workers
I’ve written above how highly paid NHS workers, among others, are incentivised by this senseless tax to stop working. But the irony is that they and other people with final salary-type pensions do better than savers such as Laura Tenison who have “defined contribution” pensions. The latter work like any pool of money: you build it up and, if you want to turn it into an income at retirement, you spend it on an annuity.
The point is that Ms Tenison’s £1m pension fund will only buy her an income of £28,000 per year (rising at 3pc per year for life). The amount of pension a final salary-type saver can build up, before being hit by the lifetime allowance, is far higher.
A civil servant could retire on a starting income of £50,000, for instance, without being hit by the tax – almost twice the benefits enjoyed by someone with the more common, but less generous, defined contribution-type pension.
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5. It is unrelated to the cost of tax relief
The Government argues that higher earners enjoy an unfairly large share of the £35bn cost of tax relief granted on pension contributions. Let’s be absolutely clear: the lifetime allowance is not related to tax relief. It clobbers pensions based on an arbitrary threshold, and not in relation to any taxpayer subsidy granted. If the Government were to introduce a lifetime limit on tax relief receivable per person, that would be a more intelligent policy (although still one this newspaper would object to).
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6. It’s onerous to administer
As the lifetime allowance drifts lower, more people are dragged in – and that means more nightmares for employers, employees and investors.
In the past we’ve associated Labour governments with burdensome legislation.
This Tory government caps them all: it’s discouraging saving and taxing us more, to boot.
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richard.dyson@telegraph.co.uk
Source: http://telegraph.feedsportal.com/c/32726/f/579309/s/4d38046c/sc/32/l/0L0Stelegraph0O0Cfinance0Cpersonalfinance0Cpensions0C121280A990CSix0Eways0Ethe0Elifetime0Esavings0Elimit0Eis0Ekilling0Epensions0Bhtml/story01.htm
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