The government has tinkered yet again with pensions for the wealthy by cutting rates and allowances.
Hoping the details will slip by without too much notice by the time they come in to effect, Chancellor George Osborne sliced £250,000 of the lifetime allowance (LTA) for the tax year starting April 6, 2014.
The LTA will drop to £1.25 million for a retirement save from this date – and the Chancellor gave no guarantee the rates will not fall further in future years as he told the House that his Autumn Statement 2012 was based on fairness.
He added this meant the wealthy will pay a fairer share of their income in tax and reduced allowances.
The Chancellor than lopped £10,000 off the annual pension contribution allowance – pushing down the maximum annual contribution from £50,000 to £40,000, starting from April 2014.
UK pensions – the figures
He explained his reasoning behind the reductions with a list of statistics:
- Only 2% of pension savers have a pot worth more than £1.25 million a year
- The median annual pension fund is worth £55,000
- 1% of retirement savers contribute more than £40,000 a year in to their pensions
- Average annual pension contributions in the UK are £6,000 a year
The Chancellor reckons the dropping the pension thresholds will save the country £1 billion a year in relief on pension contributions.
The only good news for retirement savers was the cap on drawdown has gone up after ongoing protests led by pension providers.
The rate was cut last year by government actuaries to 100% – but was increased to 120% by the Chancellor.
Change sends wrong message
“In 2010-11, tax relief for pension savings cost the government around £33 billion, with over half of this relief going to higher rate taxpayers” said the Chancellor.
“Even with changes made to reduce the cost of pension tax relief, the government is still likely to forgo around £31 billion in tax revenues this year, rising to £35 billion in 2015-16. I have protected the public finances from this growing cost by decreasing the lifetime allowance and capped annual contribution levels.”
Next year’s state pension will also increase in line with inflation – up 2.5% to £110.15 a week.
Paul Goodwin, of pension provider Arriva, said: “Changing the pension tax relief allowance will send the wrong message about the importance of taking responsibility for saving for their retirement. The change will add more disruption and complexity to pensions.
“These proposals will have little effect on our customers. Aviva’s workplace pension members on average save about £4,000 a year, while individual pension savers make regular contributions of about £3,000 a year.”