Good reads from around the Web.
Pensioners often seem as cosseted and fussed over by the government these days as pandas on the verge of getting it on in a panda sanctuary.
They’re a protected species, guarded by the pension triple-lock against the austerity that has hit other potentially vulnerable groups, and shielded from radical policies to, say, address the housing shortage that might turf sensitively coax 70-somethings and their cats from four-bedroom family homes that they can’t really afford.
That’s not to say many pensioners (perhaps including you 🙂 ) aren’t relatively poor despite a life of hard work, or that they haven’t done their bit, or that we should punish them for giving us Brexit. ((I fully know not all old people voted for Brexit by any means, and saw and met many wonderful and wrinkly Remainers on the march the other week. Just as not all Leavers are xenophobes. Etc etc.))
I just mean that when it comes to fueling the great engine of State – which most of us agree needs to be paid for – pensioners’ pennies have been kept away from the furnace. (Don’t get me started on the new Inheritance Tax rules that came in this week, although to be fair I see that as more of a perk for the beneficiaries).
We’ve even had the pension freedoms, which have given richer pensioners a sense of control akin to when they got their first Austin Allegro.
The 55% tax strikes back
Standing against this smorgasbord of delight for pensioners (and arguably would-be pensioners) is the ludicrous Lifetime Allowance, which former Pensions Minister Ros Altman lambasts in The Telegraph this week.
For those too young, impoverished, Ostrich-like, foreign, or accidentally reading this website to know, the Lifetime Allowance for pensions basically sees the Treasury taking your projected annual pension at the time you begin receiving it and multiplying it by 20. If the resultant sum is over the Lifetime Allowance – once £1.8 million, but £1 million today – you could see an effective tax charge as high as 55% on the excess. There are protections against this, but they’re a mind-bender.
Now, £1 million might seem a fortune to some of the frugalistas among you. But keep in mind it would currently buy an index-linked annuity paying merely £20,000 a year. It’s also easily breached by those on generous final salary schemes, such as those in the public sector.
Equally, the Lifetime Allowance is very hard to plan for if you’re younger and contributing to say a SIPP that’s invested in a bunch of index funds. If the market does well, you could end up being penalised for years of extra cautious saving and diligent investing. Holidays you could have taken, restaurants you might have tried – all gone up in tax smoke.
The counterargument is that the State isn’t in the business of given people a rich retirement. That may be true, but wouldn’t a Lifetime Contribution allowance – akin to the ISA allowances, and adjusted to take into account defined benefit schemes in the public sector – be a fairer and less random system?
Because as things stand, as Altman points out, people are retiring early merely to avoid it – including some super-valuable workers that we might prefer to see carrying on into their 70s.
Altman writes:
If you are on course for a £50,000-a-year pension by the time you’re 60, you will know in advance that you will come in over the limit.
In these circumstances, it makes sense to retire before you reach that point, which you can do at any age from 55, and take a reduced pension (the earlier you retire, the lower the pension).
This lets you avoid hitting the Lifetime Allowance, because the new rules don’t take into account that this lower pension would be paid for more years. They ignore the fact that you would probably receive the same amount – or even more – over your lifetime. By taking the lower pension, you can avoid the draconian pension tax, and still get the same expected pension payments in the end.
This encourages GPs and senior workers to retire much younger than they otherwise might.
This was a new perspective for me. Indeed Altman makes a pretty convincing case that the Lifetime Allowance is doing few favours for anyone, including society at large.
