The chancellor’s generosity couldn’t go on forever. Just days before his transformational reforms to pensions were enacted – the end of the compulsory purchase of annuities has at last given savers real power over their money when they reach 55 – George Osborne announced that the pensions lifetime allowance (LTA) would fall from £1.25m to £1m from April 2016.
IF A 25-YEAR OLD SAVES £1,000 A MONTH, INCREASES THEIR CONTRIBUTIONS EACH YEAR BY 2 PER CENT, AND ENJOYS 5 PER CENT GROWTH IN THEIR INVESTMENTS EACH YEAR, THEY WOULD BREACH THE LIFETIME ALLOWANCE AT THE AGE OF 67.
AGED 70, WHICH COULD WELL BE THE RETIREMENT AGE BY THEN, THEIR PENSION WOULD BE WORTH £2.68M, LEADING TO A £85,000 EXCESS TAX BILL OVER NORMAL INCOME TAX AT MARGINAL RATES.
AND THAT’S ASSUMING THE GOVERNMENT INDEXES THE LIFETIME ALLOWANCE FROM 2018 AS IT HAS PROMISED.