Well-off pensioners are set to be hit by a 'stealth tax' as the Treasury plans to put a freeze on the pensions lifetime pension allowance. The raid on wealthy pensioners' savings pots is reportedly being planned as part of the Spring budget, The Times reported today.
The lifetime allowance is the threshold above which pension withdrawals can be taxed and currently stands at £1,073,000 and applies to annual incomes as well as lump-sump withdrawals.
The threshold was set to rise by £5,800 in line with inflation in the new tax year, but the tax freeze means this won't happen.
According to the industry newsletter The Actuarial Post, the average pension pot is worth around £63,000. Even in Surrey, the county with the largest pension pot, savings reach just under £90,000 on average.
Clearly, the tax freeze won't affect the majority of pensioners; but the move is expected to raise an extra £250 million for every year it stays in place by dragging wealthier pensioners over the threshold as the value of their savings rises in line with inflation.
Senior analyst at AJ Bell, Tom Selby, said:
Given the damage wrought by Coronavirus to the nation's collective balance sheet over the past 12 months, it was inevitable all areas of Government spending – including retirement saving incentives – would come under the Chancellor's microscope, The decision to scrap lifetime allowance inflation protection for the rest of this Parliament is likely less about the modest 0.5% rise in the lifetime allowance due to kick in from April this year and more about rises in subsequent years.
If we see a vaccine-inspired spending boom in the UK this summer, for example, inflation could be pushed northwards - and so too would the lifetime allowance under current legislation. By freezing the lifetime allowance as inflation spikes, the Chancellor will stealthily drag thousands of more people into his tax net.
At the moment, withdrawals over the threshold are levied at 25%, rising to 55% on any lump sum withdrawals.
Former Pensions Secretary and partner at Lane, Clark and Peacock, Steve Webb, said:
Although pension wealth of more than £1 million will seem a huge amount to most people, probably more than a million people of working age can expect to breach that threshold based on current policies.
What people need in pension planning is a certainty. But with the LTA, we have seen the opposite. First, it was slashed, from £1.8m to £1m, then frozen, then linked to inflation and now frozen again.
It is almost as if the government doesn't have a long-term plan but makes it up as they go along.
According to The Times, at least 10,000 people would see an increase of £22,000 in tax added to their pensions if the change were to go ahead.
AJ Bell's Mr Selby warned that 'middle Britain' could soon face the squeeze if the freeze stays in place long-term:
Among those to be hit by this move will be NHS doctors who benefit from generous defined-benefit pensions. Furthermore, the longer the lifetime allowance is kept at its current level, the more of middle Britain will be dragged into its orbit. If the Chancellor does freeze the lifetime allowance at the Budget, savers will be looking for clarity on when the inflation link will be returned so they can continue to save for the future with confidence.
The Spring budget is set to be announced by the Chancellor of the Exchequer Rishi Sunak on 3rd March 2020.
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