If you are saving hard for retirement and expect your pension to bust the new £1 million fund gap – then brace yourself for another shock.
According to a leaked Treasury briefing, Chancellor George Osborne is thinking about reducing the lifetime allowance savings limits on pensions even more.
The latest figure he has in mind is between £750,000 and £800,000, according to reports.
Some suggest this limit will only apply to final salary pension schemes – which includes thousands of civil servants and public sector workers who are banned from switching their pension to an offshore QROPS.
Savers with funds exceeding this threshold face fines of up to 55% of the money in their pension pots above the lifetime allowance cap.
QROPS solution for expats
One of the few ways to bust the limit is to become an expat and switch UK pensions offshore to a Qualifying Recognised Overseas Pension Scheme (QROPS).
On the date of transfer, HM Revenue & Customs (HMRC) will check to make sure the pension does not exceed the lifetime allowance, but once the fund is safely out of reach of the UK, if the pot grows more than the lifetime allowance, no penalties apply.
Alongside tinkering with the lifetime allowance, which drops from £1.25 million to £1 million in April 2016, Osborne is also thinking about limiting annual contributions to £10,000 for all retirement savers.
The maximum annual contribution to a pension now is £40,000, although from April 2016, this tapers off for those earning £150,000 a year or more to £10,000.
Disincentive to savers
The figures sound a lot, but a pension pot of £750,000 paying out at a rate of 3% a year offers a pension of £22,500 or £37,500 at 5%.
If Osborne decrease the lifetime allowance and limits annual pension contributions, he is offering a huge disincentive to retirement savers who want to save hard for a comfortable retirement.
The details revealed by The Treasury are confusing, but the Chancellor appears to be considering a two-tier pension system which curbs how much savers with government funded pensions can save, while relaxing some rules for private savers.
In 2012, the lifetime allowance was £1.8 million.
“No decisions on pension reform have been made, but they will be available for the next Budget,” said a Treasury spokesman. “We have a wide range of options to consider.”
