Pensions: Boris Johnson and Rishi Sunak told to abolish lifetime allowance
The pension lifetime allowance is the maximum amount that you can have in your pension pot before tax becomes payable. The threshold from which you start paying tax is currently at £1,073,100. Chancellor of the Exchequer Rishi Sunak announced in March that the threshold will be frozen until 2026, meaning many people could be dragged into the tax net.
Once your pot exceeds the lifetime allowance any withdrawals attract extra tax.
Any income payments are subject to 25 percent tax on top of your normal rate while lump sum withdrawals incur a 55 percent penalty.
But economist at the Institute of Economic Affairs, Julian Jessop, tells Express.co.uk that the lifetime allowance threshold makes planning pensions more difficult, and should be abolished.
He said: “I think they should just abolish that. I think it is just an unnecessary complication that makes life very difficult for people in terms of planning their pension, and the only people who really benefit from that are tax advisers and accountants.
“I would get rid of that. If you want to raise money there’s probably a stronger case for doing something about the tax-free lump sum that you get when you retire.
“Or you could get rid of the higher rate tax relief, it seems odd that higher rate taxpayers get more tax relief than poorer people from the state. That’s a potential unfairness that could be fixed.
“But the lifetime allowance itself is just a bad feature of the tax system that should be abolished.
The big controversy regarding pensions this week was the Government’s decision to suspend the triple lock.
The Conservative Party pledged to keep it in their 2019 manifesto, but the pandemic has distorted average earnings figures, meaning pensions would have seen an 8.8 percent increase.
Such a big rise was seen as unfair, because younger working people who have been impacted by the pandemic would foot the bill.
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Work and Pensions Secretary Thérèse Coffey told MPs there has been an “irregular statistical spike in earnings” over the period during which the pension rate is set, due to the economy beginning to recover from the effects of 2020’s lockdowns.
She added: “Setting aside the earnings element is temporary and only for one year, this means we can and will apply the triple lock as usual from next year for the remainder of this Parliament in line with our manifesto commitment.”
While the Government claims it intends to revert back to the triple lock, Mr Jessop fears the policy is “unsustainable” in the long term.
He continued: “The longer term future of the triple lock does need a review as well because we do know there is going to be huge pressure on public finances because of an ageing population.
“The triple lock is not sustainable in its current form, because of the way it is designed. Pensioners get all the upsides when the economy is strong, but don’t get the downsides.
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“So what you get is a ratchet effect where pension spending is taking a bigger and bigger share of overall spending.
“I’d probably keep it in the long run until we can find a better solution.”
Speculation before the announcement surrounded exactly how the Government would change the triple lock.
Prime Minister Johnson and his colleagues eventually opted for a measure akin to a “double lock” – completely stripping out average earnings and increasing the pension in line with either inflation or by 2.5 percent.
But Mr Jessop thinks the Government should have used a new average earnings figure with the impact of the pandemic stripped out.
He said: ”I think it was right for them to change the triple lock for this year at least, I wouldn’t have done it necessarily in the way that they have done, I would have retained some form of link to average earnings.
“I would have used some underlying measure to be more consistent with the manifesto.
“As it happens though, the pension will probably come to a similar place as inflation is likely to be between three and four percent.”
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