Thursday, 16 February 2012

Cutting the Pension Annual Allowance

As some of you may be aware, I work in pensions so I tend to keep half an eye out for pension-related news.  I saw this article earlier today.

It seems to be the usual scare tactics to sell newspapers.  Apparently the government is thinking of cutting the annual allowance.  No quotes from anyone in government of course, and nothing concrete, just a lot of speculation.

There are two good reasons why I don't think that this will happen:
  1. They only just cut the allowance from £225,000 to £50,000
  2. The people most affected would be higher rate taxpayers, and most of them usually vote conservative.  Hitting them in the pocket would be a great way to lose votes.
 This sort of story just puts people off pensions for no good reason


Mark Wadsworth said...

I don't think it will put people off at all.

The Lib-Con pensions policy is basically a cut'n'paste of UKIP's 2010 pensions policy. We said why not reduce the annual limit to £10,000, which is still more than three-quarters of people can afford to put away each year, so I'm delighted that they went down to £50,000 (which is still insanely high).

So even if the limit were £10,000, three-quarters of people would simply not be affected at all.

Rational Anarchist said...

Hi Mark, and thanks for the comment.

I think I have to disagree though. £10k may be more than most can afford to put away, but when it comes to DB schemes the pension benefits can be worth more than that without you realising it.

For example, on a standard career average or final salary scheme on 60ths accrual you would be in excess of £10k with a salary of £37,500. That's without taking into account pay rises for the final salary part.

If you are talking about someone with a 60ths final salary scheme and 20 years service, then it gets even more penal. If you were to receive a 5% pay rise against inflation of 2%, then your Pension Input Amount (PIA) would be more than 10k if your salary is £22,728 or above.

For 10 years service, and a 10% pay rise, then you only need a salary of £19,800 to exceed £10k.

If you look at things like the civil service pension scheme (45ths accrual, career average), then you only need a salary of over 28,125 to be liable for a tax charge.

It may well be true that 75% of people are unaffected, but 25% is still a lot.