Nothing demonstrates the ability of governments, red and blue, to make a pig’s ear out of things more than their meddling with our pensions.
Yes, HS2 (slower than high speed) is a close second, but pensions win because long-standing government interference has strained our personal finances.
I’m not talking about the state pension, which is increasingly becoming a hugely expensive financial burden around the government’s neck.
I mean the pensions we fund with our own hard-earned salaries (plus a dose of tax relief) to build a pot for our retirement. A pot that will have to keep many of us financially comfortable for 30 years, maybe even longer.
Momentum: Chancellor of the Exchequer is expected to increase the lifetime allowance in his first budget
These, whether they are company pensions or self-invested personal pensions, have been cloaked in rules that even the late Stephen Hawking would have had a hard time understanding.
I challenge anyone who works in the pension industry to explain them in plain language. I have yet to meet someone who can.
The point is that our pensions are in danger of being destroyed by Treasury officials who don’t give a damn, in part because their own pensions are as foolproof as it gets. Gold plated. Solid as a rock. Funded by taxpayers, that is, you and me.
Friday’s exclusive report in the Daily Mail confirming that Chancellor of the Exchequer Jeremy Hunt will increase the lifetime allowance today is further evidence that the Treasury’s approach to pensions is schizophrenic. There is no long-term strategy; our pensions are to be played with at will.
Why is this messing with our financial future? It’s because Treasury officials think we should be thankful that most of us get tax relief on our pension contributions.
Such generosity, they say, comes at a price: a license to change pension rules at will. Changes that make pension planning hell.
Changes that bind us in financial knots. Changes that mean we have to hire expensive financial advisers to make sure we don’t fall out of favor with them.
An increase in lifetime allowance makes sense. This is the amount your pension fund can grow to before any surplus is subject to punitive taxes when accessed, taxes that can be as high as 55 percent. Lifetime allowance is a misnomer. is a cap
In times past (6 April 2010 to 5 April 2012) the lifetime allowance was £1.8m, but a series of chancellors have since taken it away.
It fell to £1 million in 2016 and now stands at £1,073,100. Before the chancellor’s signal that the allocation would rise in today’s budget to £1.8m, we had been told it would be frozen until at least 2026 – all part of the government’s plan to put its own financial affairs (not ours) ) in better conditions. order.
Cap: The lifetime allowance is the amount your pension fund can grow to before any surplus is subject to penalty taxes when accessed.
Of course, some readers would argue that the lifetime allowance affects only the wealthy, so it should remain frozen. It’s a fair argument: Just over 42,000 people had pension funds that defaulted in the fiscal year ending April 5, 2020.
Most were doctors and surgeons with generous pension benefits accrued in the NHS Pension Plan. Others were high officials.
But the number of pension funds defaulting on the allocation has increased markedly in the last three fiscal years.
In fact, many medical professionals have retired early during this period, citing wage erosion and the financially painful lifetime allowance as the reasons why.
And up to 1.6 million people have stopped saving altogether, or have reduced their savings to a crawl, so they don’t reach the limit.
If the allocation had remained frozen, more people, for example small and medium business owners, the real drivers of our economy, would have been trapped. In the longer term, millions of people would have seen their pension funds rub against the allowance.
Jason Hollands, managing director of Bestinvest, part of wealth manager Evelyn Partners, has done some crunching for Money Mail, based on a lifetime allocation freeze until 2026.
It says that someone with a pension of £850,000, earning £120,000 a year and making pension contributions equal to 15 per cent of their salary, could reach 2026 with a pension of £1,102,395.
This calculation is based on annual salary increases of 5 percent and annual investment growth within the pension of 6 percent. In other words, they would be in extra-fiscal territory if Mr. Hunt had not acted.
Although Labor will no doubt argue that a rise in lifetime allowance is Mr Hunt just looking after the rich, it was a Labor chancellor, Alistair Darling, who allowed it to rise to the dizzying heights of £1.8m.
While Darling, in the aftermath of the 2008 financial crisis, said it would stay at that level until the fiscal year beginning April 6, 2015, it was the Conservatives (initially with some help from the Liberal Democrats) who later they reduced it to £1 million in 2016, before increasing it to £1,073,100 in 2020, where it has remained ever since.
So Labor’s shadow chancellor, Rachel Reeves, won’t have a leg to stand on if she stands up after Mr Hunt’s budget speech and attacks the increase.
On a philosophical level, some would argue that there should be no lifetime allowance. Mr. Hollands sits in this camp. He says that he is financially immoral and should be removed.
Squeeze: Chancellor Jeremy Hunt could place a restriction on how much tax-free cash people can withdraw from a pension
Because? It’s simple. For those who self-manage their pension funds or have them invested in a defined-contribution pension fund, the allocation penalizes the success of the investment. It’s a tax on aspiration, plain and simple.
Why should someone who expertly manages his or her pension fund have to pay taxes, while someone else who enjoys less investment success runs away?
Since the annual amount that employees and employers can invest in a pension fund is capped at £40,000 (£60,000 from the start of the new tax year), that should be it.
As long as this annual limit is respected, the Government should encourage all pension savers to take care of their fund and strive to increase its value.
Two other important points about the lifetime allowance.
Firstly, it seems terribly unfair that some people have refrained from funding their pensions in recent years for fear of exceeding the £1,073,100 limit.
Yes, some were able to sign so-called fixed protection statements that enabled them to secure higher lifetime limits of £1.25m, £1.5m or £1.8m, provided they stopped contributing to their pension.
But many others with pension funds close to the lifetime allowance simply stopped putting money into the pension plans. I imagine many of them are now spitting feathers over the fact that they were disenfranchised from using pensions to fund their retirement.
I met one of these feather-spitters for coffee yesterday, a charming public relations consultant who has worked in the financial services industry for over 20 years and built up a sizable pension fund in the process. She doesn’t earn much, but she has saved money through thick and thin.
Before I could take my first sip of double espresso, without prompting, he launched into a tirade against Mr. Hunt, the Treasury, and politicians in general. “I feel like I’ve been cheated on,” she said. ‘Used, financially abused, a mere pawn of Treasury meddling.’
For the last three years, he has not made any contributions to his pension for fear that his fund will exceed the lifetime allowance. She was effectively excluded from the pension system.
Yes, the new £1.8 million lifetime allowance means you’ll be able to start contributing to your pension again. But he has lost three years of savings, and three years of investment returns, through no fault of her own.
I doubt Mr. Hunt would apologize to those, like her, who have been prevented from building even more formidable pension fortresses.
But he very well should. At the very least, they should be given an explanation of why it was considered right for so many years for the government to compromise people’s ability to save for their future.
Finally, and this is my great fear, in exchange for a more generous £1.8m lifetime allowance, a larger £60,000 annual allowance and more scope for workers to rebuild their pensions after to access them, will Mr. Hunt have something unpleasant on his mind? pension sleeve in retaliation? A form of quid pro quo? Maybe not today, but maybe next year.
Some, including Mr. Hollands, fear this is the case.
Hunt could place a restriction on the amount of tax-free cash people can withdraw from a pension.
Currently, 25 percent of a pension fund can be taken as tax-free cash, and anything else taxed as income. Hunt could limit you in terms of cash to, say, £250,000.
Alternatively, it could incorporate pension funds into the inheritance tax regime. Or it could turn to the state pension and bring forward the date by which people have to work longer to receive it.
More pension mess? More meddling in pensions? More need for expensive financial advisers? Don’t rule out any of these. We will find out everything before the end of the day. Tin hats ready.
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