The tax raid on pensions in today's Autumn Statement was widely predicted, but when George Osborne sat down, the pensions industry was still up in arms. The changes look like they will only hit a tiny proportion of savers, but the experts warn that the impact will be much more far-reaching.
So what do the changes to pensions mean for you?
Lifetime limitOsborne produced two major blows for pensions. First, he lowered the lifetime limit on tax-efficient pension saving from £1.5 million to £1.25 million - which means this is the maximum you can hold tax-efficiently in a pension.
MGM Advantage has done the maths to reveal what this actually means. They used the example of Jim, who has worked for his employer for 40 years and is in a defined benefit scheme building up a benefit of 1/60th for each year of service.
When he retires - once the new lifetime allowance is in force - his pensionable salary is £97,500. His pension at retirement is £65,000 per year, and the value of this benefit can be calculated at £1.3 million. This exceeds the new lifetime allowance of £1.25 million, which means Jim is due a tax charge on the excess of £50,000. If he takes this amount as a lump sum the tax charge is 55%, or £27,500.
ImpactFraser Smart, managing director of Buck Consultants, says that the impact will be felt beyond Jim and his peers. He explains: "Reducing the lifetime allowance to £1.25 million because "98% of people approaching retirement are saving less than this" is more or less saying the current retirement savings situation Britain is alright - when clearly it isn't."
"People need to save more if they are to financially meet their expectations in retirement. Furthermore, given the reduction does not reflect inflation, in real terms, the maximum amount of pension allowed under the system continues to reduce."
Annual allowanceOsborne also announced that the annual tax efficient contribution would be capped at £40,000. This is down from £50,000 - which itself has only just been reduced from £255,000 (in 2011).
This is likely to hurt those who save very little as they go along, and make big contributions once their other commitments are over - such as business owners, who tend to spend every penny on the business and then invest in a pension after they sell. Ray Chinn, LV= Head of Pensions says: "The reduction in annual allowance will hit these individuals hardest."
Tony Bernstein, senior tax partner, HW Fisher & Company chartered accountants, said this is also likely to be a major blow for those in final salary pensions. He says: "While announced as an attack on the wealthy, the real losers are likely to be those within final salary pension schemes, primarily within the public sector. It hits these people hard in the pocket and will leave them facing personal tax charges even though their pension arrangements are dictated by the employer. Higher earners in the private sector can control how they save for retirement and can therefore plan their way around this quite easily."
MGM Advantage has calculated the example of Brian, a teacher with 30 years in the pension scheme, building up 1/60th of this final salary a year. It assumes he is paid £55,000 at the start of the year and is promoted so he earns £60,000 at the end of the year.The increase in the value of the pension (after going through some mathematical jiggery pokery) is calculated as £44,992 - leaving Brian with almost £5,000 over the allowance, and a tax charge of almost £2,000.
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During his statement, Osborne argued that the change would only affect 1% of people who save into a pension. However, as Andrew Tully, Pensions Technical Director at MGM Advantage points out:"This sends the totally wrong signal to savers across the country who are trying to do the right thing. It is not so much the 1% of wealthy people who are immediately impacted by this change, but the legacy of undermining yet again the pensions system when we least need it."
There is a ground-swell of feeling that the government is supposed to be supporting more investment in pensions - so by imposing taxes on some of those who have saved, it risks putting people off. Chinn says:"We're concerned that it sends the wrong message not only to those who are currently saving for their retirement, but those who should be."
Yet more changeThe experts argue that this is particularly damaging as it comes on the back of so many pension changes. Smart says:"Making such a big change just three years after the last changes to pension saving limits is extremely poor policy making and one we will end up paying the price for over the next 60-70 years. Reducing pensions tax relief may bring in £1 billion in tax revenue in the short term but coming just two weeks after the DWP launched its 'Reinvigorating Pensions' paper to try to get people to save more, the timing couldn't be worse. The Government needs some joined-up thinking if we are to ensure that future generations have enough savings to avoid falling back on the State to provide for them."
Tom Stevenson, Investment Director at Fidelity Worldwide Investment adds: "If the Government continues to tinker with pension tax relief, the danger is that savers could be put off saving into a pension altogether or, worse still, choose not to save at all. We hope the Chancellor will leave pensions alone so prudent savers can be reassured that the goal posts will not simply move again. The government should get back to really supporting the virtues of personal responsibility and thrift."
DrawdownHowever, the statement wasn't all bad news on pensions. There was also a small ray of light for those currently using drawdown arrangements. The way that the rules work mean that market movements have effectively meant that each year they have been able to withdraw less and less money from their pension. To add insult to injury the GAD rate was reduced from 100% to 120%. Osborne announced a move back to a GAD of 120% - allowing people to take more income.
Stevenson says: "We congratulate the government on its willingness to back-pedal on the unhelpful reduction in the income pensioners can enjoy in flexible draw-down arrangements. The return to 120% of the GAD rate recognises that many prudent savers who have seen their incomes plummet recently have been unfairly treated."
Smart agrees: "In a time when pension income from defined contribution schemes is under considerable pressure, anything that improves the options for members is to be welcomed."
However, Chinn adds: "We would still advise caution, and urge people take advice around the sustainability of income levels in drawdown, and to look at the wide spectrum of products available in the retirement income space."