The lifetime allowance ‘timebomb’

Our new policy paper explains why the lifetime allowance (LTA) is set to change from being a concern to a small minority of savers, to a mainstream concern in pension planning.  Policy Paper 31[1] – ‘The Lifetime Allowance timebomb’ – provides the first estimates of the cumulative impact of three large cuts in the Lifetime Allowance in recent years.  It draws on the Government’s ‘Wealth and Assets’ survey which follows the same people over a series of years and measures how their defined benefit and defined contribution pension wealth evolved over time.  We took this information and used it to estimate how many of those in the current working age population are already over the LTA or are set to be, based on current trends.

How many could be impacted?

The findings of the research are striking.

Looking just at those who are still economically active, the paper finds that around 290,000 people have already accrued pension wealth in excess of the current LTA.  Very few of these have yet to crystallise their pension savings but many could be looking at a tax charge when they finally do so.   Our earlier investigations found that only around 100,000 people have so far successfully applied for the various ‘fixed protection’ options available to those who wish to ‘lock in’ a higher level of LTA.  This means that even if every person who had ever applied for fixed protection was included in the 290,000 at risk, that still leaves nearly 200,000 in line for a tax charge.  Worse still, a significant proportion of these people are still accruing pension savings, [FK1] thereby adding to their future bill possibly without them being aware of it.

In addition to those who are already over the LTA, the paper projects for the entire working age population how many could have an LTA issue based on their pension savings to date and reasonable assumptions about their future earnings and pension contributions.  It finds that an additional 1.25 million people could be expected to exceed the LTA if they don’t take action to prevent this from happening.

Defined benefit pension savers

Looking in more detail at those at risk, the largest group remains those who are building up DB pensions. Despite the big decline in DB pensions in the private sector, more than a million private sector workers are still actively building up DB rights and around five million public sector workers are doing so.  A long period of service in DB employment in a relatively well paid job is likely to lead a significant number of people to need to think about LTA issues.

Higher employer contributions

The other main group is those in workplaces with DC arrangements where the employer makes a substantial contribution. The combination of a long period of relatively well paid employment and a good rate of contributions can easily generate DC savings at or above the LTA.  Typical wage levels today for those at risk were in the £60,000-£90,000 bracket. This may be because those with the very highest earnings are capped by the tapered annual allowance, and so are unlikely to contribute enough to breach the LTA.

There’s no doubt that there is a huge potential advice opportunity here, perhaps including engaging with accountants who may be helping with tax returns for those most at risk, to make sure that people don’t sleepwalk into an LTA charge.