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Why Osborne's wrong to reduce the pension lifetime allowance

30th Mar 2015
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retire I wanted to know the amount I would earn if I started on £25,000 when I was 25 and got steady wage rises of 5% pa till I was 65. The answer, according to this little modeller , is just over £3m. So an average person on average income over an average working life earns and spends around £3m. Put like that, capping the amount we can spend for the rest of our lives at £1m, which is what the new Life Time Allowance is asking us to do. Is limiting our capacity to spend in retirement to about a half of what we earn and spend when at work. (I've adjusted the numbers to take into account inflation plus growth on the £1m pension pot.

  I have always found that I spend more when on holiday at work, there is just more opportunity to spend. So it's even more incomprehensible that a conservative politician should define our ambition for a retirement income by a lump sum so low. Put another way, our lifetime earning capacity is by far our biggest asset, the value of our capacity to earn dwarfs our capacity to save or build equity in our houses. Relative to £3m and for people on more than average earnings, multiples of £3m, the £1m LTA is now a kind of basic private pension.

  The way that Osborne talks, the 4% of us who save all our lives to get more than a million into our pensions might as well be lighting cigars with $100 notes in the Cayman islands. The implication is that we are screwing the poor by taking too much of the pension pot. But nobody saved into a private pension unless they were paying tax in the first place. I am tempted to suggest that the majority of people George Osborne could have pissed off my this tax measure are well out the other side of paying tax on their earnings (or even their savings). So who is this a tax on? It's a tax on "hard working families" who want to wind down from work in comfort. It is grossly misjudged, as was the cut in the LTA from £1.8 to £1.5m. Steve Webb is quite right in stating that tax relief should be limited on contributions and should be progressive, encouraging those earning at basic rate to save more. Webb argues for a flat rate of tax relief at 33% capped by a reduced annual allowance so that no one gets more than a £10k subsidy from anyone else to build money up for retirement.

He is right, pension planning should be about diverting a slice of income every year into a savings plan that grows in time to provide a capital reservoir which can be drawn as per an individual's choice. There are some who may want to invest a windfall to catch up years when they cannot contribute. But the majority of us must bet into the habit of saving at least 8% pa of our lifetime income into a tax-advantaged plan if we are to have any chance of financial comfort in our later years. And most of us - under auto-enrolment - are getting there. The new normal is to save. But if the new normal is to have to fret about the possibility of saving too much and accidentally triggering 55% tax-bills, the joy of the thing is gone. Of all the ways of limiting pension tax relief, the capping of the annual allowance is the most regressive. It sends out the message that investment growth doesn't matter, that cutting costs doesn't matter and that any kind of financial windfall resulting from markets or an unexpected capacity to contribute, must now be considered in a jaundiced light. I hope that Gregg McClymont and Steve Webb will rally some support against the new reduced LTA, it is a pernicious tax that deprives us of pension ambition and is a charter for the tax dodgers and tax-scamsters who- even now will be working out new ways for the super-rich to subvert the legislation. We should scrap this LTA altogether and allow people to enjoy their pension savings fearlessly.

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By carnmores
30th Mar 2015 09:54

Osborne's absolutely right and should go further

people with a pension pot over £500k should not qualify for a state pension , some of these taxpayers have had tax relief at 60%+ , this is wholly unjust. 

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By Alan Davies
30th Mar 2015 10:15

Bitter

I think Henry is still very bitter about how this decision effects him personally.

Working in the pension arena however he should have been aware of the political risk around pensions and developed a more balanced retirement portfolio using ISA's & property for example.  When an investment is good because for tax reasons only everyone wisely says 'its the tail wagging the dog' and it needs to be recognised that a pension is merely an investment too.

 

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By User deleted
30th Mar 2015 14:20

Confused …

Becoming bored with constant having a go of those who have tried to provide for themselves – whilst accepting anything is OK at the other end of the scale

Don’t really think @henry is bitter just logical – furthermore, he has provided figures to back up his stance, which is more than the reply has done

@carnmores is right about 60% tax (should be BR only), but that is historical and it’s no good re-writing the past now – just move forward on a more equitable basis of BR relief only

However as a general principle, why should ‘.. people with a pension pot over £500k should not qualify for a state pension ..’ – surely they have already paid into this ‘State Sponsored Pension Ponzi Scheme’ in the first place? Or are we saying that in future they don’t have to stump up money to join the state system

Also, does this mean that they are expected to contribute on yet another front without getting any benefit – quite frankly the entire welfare system needs a root and branch revision. Furthermore, there are successful welfare models in other countries which encourage people into work and operate very successfully, yet the UK has shied away from implementing them because of the political fall-out of changing the welfare system

As for offering political bribes to certain sectors of the electorate which then need to be funded by everyone else. What about proposed changes to right-to-buy with discounts on Council Houses of £77k outside London & £102k inside London – frankly if people can afford to buy these properties then they can afford to move out and release them for someone less fortunate than themselves. Flogging these properties & then having the 'thought police' insist that affordable housing is required is just a joke, especially when it could turn out to be given away to someone at a heafty discount - instead of being used to relieve housing pressures for the future

We all know that the NHS is under pressure, but nobody is willing to face up to the real purpose of the NHS or tackle the issues of ‘health tourists’ – especially on certain fronts (i.e. HIV/Aids or long term medial situations etc.), because it is more convenient to shut down the debate than address difficult questions. For instance, what is the purpose of the NHS - fundamental health issues or all manner of other areas such as designer body changes?

Finally, if you are looking to address another little wheeze then look no further than the almost corrupt Motability scheme – yes the disabled need transport but at a basic level (without the ability to ‘top-up for a Range Rover/BMW) – where the CEO seems to get £700-800K per annum & the commercial arm is sponsored by the banks (Charities using commercial & charitable status concurrently)

So we (the rest of us) all keep paying up and matters just deteriorate because nobody has what it takes to sort it out

Compounded by the other issue of refusing to address public sector pensions & place them on the same footing as most private sector footings

These are the in-equalities in the system and not someone who has already paid their dues twice on the pension front (once for state & once for private) – perhaps before we start having a go at those who have saved for their future we should look to those who have no wish to find employment and not only been underwritten for the whole of their working life but also stand to collect the state pension – have in made no contribution to either aspect

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By k743snx
30th Mar 2015 14:24

carnmores - on the other side of the coin, some of the people you would so willingly deprive of a state pension might think it "unjust" that they still had to pay NIC's all their working lives.

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By Alan Davies
30th Mar 2015 17:54

Don't get me wrong

I agree with Henry on both providing for yourself and the immorality of moving the goal posts on something as important to individuals as their life long saving into a pension pot.

However for someone heavily involved in the pension industry he should have understood the risks involved.  His last article stated that he had ignored advice to invest in none pension related investments, as an 'informed' individual he has taken a risk and should understand the whole 'can go down as well as up' type disclaimers.  I genuinely feel sorry for those individuals hit by this moving the goal post type legislation who were not employed in the pension arena - who never fully understood the risks or had them explained to them. 

I certainly don't agree with carnmores though.

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By carnmores
04th Apr 2015 18:11

talking of bribes

are tax credits the biggest ever exercise in gerrymandering ?

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By Henry Tapper
06th Apr 2015 10:34

Cobblers shoes!

For most of my career I've been self-employed and most of my money in pensions has been paid in by me. Which does make me bitter - especially as I see people I was at college with, who have had pensions sponsored by employers.

But that's just a little thing.

Relative to most of my customers, I am very pension wealthy. I like to practice what I preach, this cobbler is proud of the shoes he wears!

We are working hard to restore confidence in pensions and I'm bitter that this Government policy is doing the opposite.

 

 

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By Henry Tapper
06th Apr 2015 10:36

Cobblers shoes!

For most of my career I've been self-employed and most of my money in pensions has been paid in by me. Which does make me bitter - especially as I see people I was at college with, who have had pensions sponsored by employers.

But that's just a little thing.

Relative to most of my customers, I am very pension wealthy. I like to practice what I preach, this cobbler is proud of the shoes he wears!

We are working hard to restore confidence in pensions and I'm bitter that this Government policy is doing the opposite.

 

 

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By carnmores
06th Apr 2015 10:47

confidence in pensions

WHAT? CON yes !

 

when pension companies have been robbing everybody blind for decades

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By User deleted
06th Apr 2015 11:11

Cost of Public Sector pensions £1,600+ pa each …

The good news is that we are all forking out around £1,600 pa each for public sector pensions – so even at today’s rates over a 40 year lifetime you will be glad to know that your contribution will have been £64,000 to someone else’s pension

Now bearing in mind that the average private sector pension pot on retirement is £25k-£30k – isn’t it just heart-warming to know that you will have contributed £64k to someone else’s retirement – even if you could not afford to make prevision for yourself

This is the problem – and when coupled with ridiculous public sector salaries where thousands of employees are paid more than the PM (with the ensuing pensions legacy) – if I were the youngsters of today I would be up in arms about the burden of public sector pensions for my future and that of the country overall

And yet no Government is prepared to address the matter – snouts in troughs springs to mind

Stopping this public sector pension ABUSE forthwith would allow most of it to wash out of the system over the next 30 years and give the next generation some hope

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Replying to FirstTab:
By Henry Tapper
06th Apr 2015 14:29

Couldn't agree more

JC wrote:

Stopping this public sector pension ABUSE forthwith would allow most of it to wash out of the system over the next 30 years and give the next generation some hope

 

Part of the problem with public sector pensions is that they don't form part of the DWP's brief. They are part of the Local Govt. brief and are allowed to be used as a means to keep everyone happy, when all else in Local Government isn't.

 

As in "political football"?

 

 

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