Despite the gripes about the decreasing lifetime savings limit on retirement pots, Pension Minister Richard Harrington believes the £1 million cap is too generous.
In a controversial but revealing interview, Harrington says The Treasury has got pensions policy right and that savers should not expect any action to lift the limit.
The lifetime allowance (LTA) is the total amount an individual can save towards a pension.
The allowance is a personal amount and not an amount for each pension.
Over the years, the LTA has shrunk from £1.8 million in 2011 to the current £1 million.
Savers need to find £10,000 a year
Anyone saving more than the LTA cap faces a 55% tax penalty on the excess when they retire.
“The Treasury has got its own pressures,” the minister said in an interview with New Model Adviser, a trade paper for IFAs.
“What I would say is although the pot is only £1 million, that doesn’t mean you can only save £1 million, it just means that taxpayers won’t help you beyond that and governments have to make that kind of choice with everything.
“If I just look at the numbers at the base end – the state pension is just over £8,000 per year and the average amount people need to retire on, based on 65% of the average salary, is £18,000.
“That means they must find another £10,000 per year, so a pot for argument’s sake of £250,000. The government is basically saying you need £250,000 to retire to get your income to the average, and we are prepared to allow you four times that with the LTA.”
Retirement options
Harrington also explained that pensions are not the only retirement saving option and the LTA is not an automatic cut-off.
“The way some of the IFAs speak is as if the limit is a complete cut off. I am afraid it is just the sort of decisions governments have to take – not in my department as it is a Treasury matter. But to them it is money which they would be getting in tax, but they are not and that is their job.
“The implication is that the government cuts you down and that is all you can save and therefore you can’t possibly make your retirement. But the LTA limit doesn’t stop people doing other things with their money. With ISAs you can put in up to £20,000. So if you add that through after they are over the £1 million pot, it is not as if it suddenly stops.”