Little has been left untouched by Russia’s invasion of Ukraine. Add to the growing list the British tax system. Because a U-turn on planned rises to National Insurance rates from April must surely now be under consideration.
Even Chancellor Rishi Sunak’s most steadfast supporters must see that hiking taxes on pretty much the entire population is not realistic given the once-in-a-generation fall in living standards we are about to experience. The price of energy is the chief culprit and the war means bills are now certain to rise even higher than was feared as Russian crude supplies and natural gas are choked off.
Pension lifetime allowance tax charges are less eye-catching than NI rises but just as damaging to those hundreds (yes, hundreds) of thousands of extra savers that will end up paying a penal rate of tax as a result of Mr Sunak’s fiscal drag ruse.
It’s why the Telegraph recently launched a campaign calling on the Chancellor to quickly thaw the freeze to lifetime limit on pension savings before it is too late. The cap was stuck at £1,073,100 in April 2021 and will not budge until at least 2026 under the Treasury’s plan. Compare this to the £1.8m the allowance was worth at its peak a decade ago. And all this from a political party supposedly in thrall to pensioners.
In real terms, the effects of the freeze are staggering if inflation does continue to run hot. The war has further tightened bottlenecks in global supply chains caused by the pandemic, Brexit and other factors, and it looks like it will be a long time until the Bank of England is anywhere near its official 2 per cent target.
If the cap was still pegged to inflation it would be on course to reach £1.37m by 2025, £300,000 more than it is today. That figure assumes the cost of living rises at 5 per cent annually, which is likely to drastically understate the problem given that the Bank thinks inflation will top 7 per cent next month.
When it was introduced in 2006, the cap was expected to capture the wealthiest 5,000 or so savers in Britain. Now Sir Steve Webb, reckons more than 1.6 million people will pay a tax charge for being prudent enough to save for their retirements and daring to seek out good returns on their investments. Sir Steve should know – he presided over a few cuts to the allowance himself!
The Government concedes that one in 10 people approaching retirement will be caught but has argued it is necessary to help repair the public finances after Covid. This at a time when suspension of the triple lock on state pension payments will also serve to erode the real value of retirees’ income.
Reconnecting the lifetime pensions limit with inflation is the obvious and fair solution. Spending the full allowance on a joint inflation-linked annuity would barely get you £24,000 a year in today’s market. Yes, very few people buy annuities these days but you get the point. If the same person qualified for the full state pension, their total income would still fall short of the £33,600 a year the Pensions and Lifetime Savings Association deems a comfortable retirement salary. It’s well known why so few MPs seem bothered by this nonsensical straightjacket – their own defined benefit pensions can provide double the income without breaching the limit.
Ideally the lifetime allowance would be abolished entirely. We already have a (ridiculously complicated) annual allowance, which could be lowered if the Treasury felt strapped for cash one year or raised in the good times. As has been pointed out countless times before, penalising good investment returns is perverse, if not outright theft by taxation.
Mr Sunak is gambling on two things. Firstly, that most people don’t know what the lifetime allowance is and don’t realise how damaging fiscal drag can be. Secondly, he will argue people with £1m-plus pensions are rich enough to be milked. He’s wrong. People who have foregone their salaries for the promise of a reasonable retirement should be rewarded, not turned into targets when a Chancellor finds himself short comes Budget time.
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