"Reducing the savings incentive for many higher earners, while hiking the state pension could end up stoking intergenerational tensions and does raise questions about fairness."
The Telegraph reports that “well-placed sources” have said that the Treasury is considering plans to change the way pension contributions are taxed, following a huge increase in public spending during the pandemic.
One proposal is to cut the pensions lifetime allowance (LTA) from £1,073,100 to £800,000 in the next Budget.
In this year's Spring Budget, the Chancellor pledged to freeze the current LTA rate at £1.073m until April 2026.
However, changes to pension tax relief could allow the government to maintain the pensions triple lock.
Last week, former pensions minister Steve Webb warned that the Chancellor could end up ‘fudging’ the figures to scale back a multi-billion pound increase to state pensions under the triple lock.
Under the triple lock policy, state pension is increased by the highest of either the growth in average earnings, the growth in prices as measured by CPI, or 2.5%.
In addition, it is a legal requirement that the increase has to be at least in line with average earnings. However, recent average earnings have soared by 5.6%, with CPI inflation rising to 2.1%.
Steven Cameron, pensions director at Aegon, commented: “Once again the prospect of reforming pension tax relief for higher earners is being floated as a means to restore holes in the government’s finances. What’s different this time is that the state pension triple lock is also firmly in the spotlight with recent earnings anomalies likely to grant current state pensioners a bumper increase next April. Reducing the savings incentive for many higher earners, while hiking the state pension could end up stoking intergenerational tensions and does raise questions about fairness.
“Today’s speculation also highlighted the possibility of a further cut to the pensions lifetime allowance. Given this was frozen at the recent Budget any further change would be particularly punitive. The current allowance only buys an annual guaranteed income of around £1,700 a month, which is hardly going to buy a life of luxury.
“On the broader point about tax relief, we aren’t against the principle of a flat rate but any reform would need to be carefully thought through and also balanced against intergenerational considerations. There are broader challenges to reform of tax relief, as they would be highly complex to implement, particularly for defined benefit schemes. This means individuals and pension schemes would need sufficient time to adapt and we’d encourage the government to take a long-term view on the implications any changes.”
Nigel Green, chief executive and founder of deVere Group, said: “Successive governments have a long history of seeing pensions as easy targets when they need to bolster their coffers.
“I would suggest that if this option of slashing the pensions lifetime allowance has been leaked in advance to the media, there’s a very good chance that it will happen.
"This reported move by the Treasury would be a stinging, stealthy raid on pension savings. It would be a slap in the face for those who have worked hard and saved hard, prudently putting money aside in order to be able to enjoy their retirement with loved ones.
“There’s a much, much bigger cohort of people who should be taking action now to mitigate the financial hit of the possible slashing of the lifetime allowance.
“It’s not just those who already have a pension over £1m. Others need to look ahead and assess if future contributions and investment growth could drag them into a position in which they’ll be above the threshold.
“This move would serve as a disincentive to save as much as possible for retirement – and therefore it could be harmful to Britain’s long-term economic success."
Andrew Tully, technical director at Canada Life, added: “This proposal from the Treasury simply sends the wrong signal to savers trying to do the right thing at a time when we should be encouraging people to save for retirement, rather than threatening to penalise them with an arbitrary tax charge. We already have annual limits on the amount you can save via a pension wrapper and there is a significant disparity between how defined contribution savers and those with defined benefit income are treated for lifetime allowance purposes.
“The last 10 years has seen the lifetime allowance fall from £1.8m to £1m; stay frozen at £1m; gradually increase by inflation; and now is frozen again. These continuous changes to pensions policy exacerbate the uncertainty many people feel around pension saving. Instead of constant tweaks we need stability to give people confidence to save for the long-term.”
