Why the pension allowance reduction doesn't matter

The pension industry wasn't happy after the chancellor's Autumn Statement following the reduction in the personal allowance but will it really affect the average person?

Prior to the chancellor's announcement, Britain's pension experts made many grave predictions for the state of UK pensions if there was anymore tinkering, but George Osborne went through with it anyway.

%VIRTUAL-SkimlinksPromo%The pensions annual allowance – the amount you're allowed to put into a pension each year, receiving tax relief – has been reduced from £50,000 to £40,000 from April 2014.

From the same time the pension lifetime allowance – the amount you can put into your pension over its lifetime – has also been reduced from £1.5 million to £1.25 million from 2014.

There has been lots of talk of 'moving goalposts' and of damaging trust in pensions, especially considering the lifetime and annual allowances took a battering just two years ago, being reduced from £225,000 and £1.8 million respectively.

But actually, the reduction of these allowances won't affect the average person, who isn't even earning £40,000 a year let alone has that amount to save into a pension.

The average person in the UK earns £26,000 a year and saves about that into their pension over their lifetime. I can't see many people up in arms about the reduction in the annual allowance.

I have long said that the higher rate pensions tax relief should be scrapped, but maybe reducing the allowances for pensions gradually will have just the same effect.

A reduction in the limit will mean the government will not have to pay out as much higher rate pension tax relief as it's most likely to be higher rate tax payers who are saving these huge sums into their pensions.

The question is how far does the allowance have to reduce to save the £7 billion a year that scrapping higher rate pensions tax relief would save?

It never looks good for a government to cut a tax relief completely, but this is a clever way of getting round the higher rate tax relief conundrum.

This has been a big sticking point for the pension industry but it is understandable that the man on the street will have little sympathy for the wealthy people bemoaning the reduction of a £1.5 million tax allowance. For most of us saving £40,000 into our pension over our lifetime is a big ask, let alone £1.25 million.
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