interactive investor comments on potential pension reforms

As speculation mounts, our experts respond.

• Calculations from interactive investor show that a 45-year-old higher-rate taxpayer with a £300,000 pension pot, who contributes £1,000 a month would only hit the pensions lifetime allowance (LTA) limit after 15 years assuming a 5% per year growth. A lower-rate taxpayer would hit the cap after 17 years.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “With speculation growing about potential cuts in income tax relief on higher-rate taxpayers, faith in the pensions system is shaky at best for many, and is causing palpable anxiety. The potential extension of the period of no inflationary increases in the pension lifetime allowance means that more and more savers face paying a 55% tax changes on amounts above LTA ceiling. It is another example of fiscal drag – which is the ultimate stealth tax.

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“The worry is pension savers who have been kicked around like political football, will miss out on valuable tax relief by deciding not to save more into their pensions in fear that they might exceed the LTA limit.

“The freezing of the LTA is compounded by fears of an inheritance tax squeeze. Passing on wealth to younger generations is hardwired into many peoples’ DNA. In our 2022 Great British Retirement Survey, one of the largest of its kind, not being able to pass on wealth to loved ones through inheritance was considered the largest financial concern by more than a quarter (28%) of respondents from our nationally representative survey.

“And there is still a great degree of uncertainty around the pensions triple lock. The policy has become a symbol for doing right by older people, but with public finances at its most stretch since the post-Second World War era these are worrying times for current and future generations.

“We need a public confidence boost in state and private pensions, rather than erosion.”

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Myron Jobson continues: “The link between protecting retired incomes and overall health is clear from ii research findings. Preserving the triple lock could therefore have knock-on benefits to health policy. While market volatility this year has shown that a guarantee that is linked to ‘the highest of’ inflation, wages or 2.5% can be problematic, reforming the way the triple lock is applied, to a smoothed measure, rather than focusing discussions on its removal, could have knock-on benefits to NHS spending.

“Insufficient retirement income is a health risk and should be treated as such in policy discussions. The advantages of the state pension triple lock are numerous, and it should be preserved.”

Alice Guy, Personal Finance Editor, interactive investor, says: “The lifetime allowance rules put a cap on the amount you can save into your pension, currently £1,073,100. Anything saved into your pension over this amount is taxed at a much higher rate, currently 55% for lump sum withdrawals.

“Having a pension pot worth more than £1 million may seem enormous but it translates to an annual defined benefit pension of £53,655, which is achievable for higher-earning doctors and many others. The rules are encouraging many doctors to retire early as they are worried about high tax charges.

“The lifetime allowance was £1,500,000 when it was introduced in 2006, but it has been reduced over the years and then frozen, rather than increased. Further reducing the lifetime allowance will discourage people from saving into their pensions and could leave the next generation struggling to achieve a comfortable retirement.

“A private pension pot of £1,073,100 would give someone a pension income of around £32,193 per year if they withdraw 3% per year from their pension. It’s a modest amount and is only around the current average salary in the UK."