Successive governments have viewed private pension savings as a golden goose for a beleaguered Treasury. This is a consequence of the estimated £35bn provided in annual tax relief for pension savers. To date, the Treasury has utilised two weapons to try and reduce this figure – both of which have undoubtedly made the pension a less attractive option for many.
1. The lifetime allowance
The ‘lifetime allowance’ is the total that a person can amass within a pension during their life without incurring a tax penalty. Labour introduced the concept in the 2006-07 tax year with the cap set at £1.5m, which eventually increased to £1.8m by 2010. However, this currently stands at £1m due to regular reductions to the allowance. Based on current annuity rates, a pension of £1m would provide an income to a healthy 65 year old of approximately £20,0001 per annum. Questionably, this amount is insufficient at a time when retirement costs are spiralling.
2. The annual allowance
There have also been successive restrictions on an individual’s “annual allowance”, which is broadly the amount that an individual can contribute to or accrue within a pension in any given tax year and receive tax relief. The 2015 Budget introduced a tapering allowance. This saw many ‘high earners’ restricted to contributions of £10,000 in the most severe circumstances. As such, many are now caught in the “tapering trap”. This is the point where although an individual has the means to make larger pension contributions, they are restricted by the tapered annual allowance.
What does this mean for the pension?
However, not all changes to the pension have been disadvantageous. The fundamental changes introduced in 2014 in how individuals can take a pension income have made controlling retirement income more effective. This has assisted many in managing their income tax position. The change to pension death benefits also seems advantageous when viewed through the kaleidoscope of estate planning.
The unabated rise in life expectancy continues to highlight the importance of retirement planning. A pension still offers tax relief on both the way in and out, while a coherent investment strategy will allow a pension to grow in a tax free environment. This tax privileged status ensures the pension is still an arrow in the retirement planning quiver for many.
In conclusion, there is no doubting the attractiveness of pensions has decreased over the last decade. For many, gone are the halcyon days where individuals can rely on only their pension to provide security in retirement. However, perhaps a death knell remains premature.
A pension savings vehicle is likely to remain as a foundation stone of one’s financial planning and its interaction with other financial assets will dictate financial security in retirement.
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1 Based on joint annuity, increased with inflation for a married couple in good health (moneyadviceservice.org.uk)