Nick Salter, President of the Institute and Faculty of Actuaries (IFoA) comments on the cut in Lifetime Allowance announced in today’s Budget Statement:
“The Chancellor announced in today’s Budget a cut in lifetime allowances (LTA) for pensions savings from £1.25 million to £1 million and indexed thereafter. This could have a significant long term impact on the ability of those individuals caught by the cap to receive their retirement income without being disadvantaged by tax charges, with perhaps unintended consequences. It could affect hard working people who are not earning a very high salary but who have a significant number of years in service, such as a senior nurse working for the NHS for the majority of his or her career.
“DB schemes are regarded by many as more generous than DC schemes. The guaranteed pension income – usually defined as a percentage of a person’s salary near to retirement – also makes planning for later lifetime income easier than a DC scheme where the size of a pension saving pot, investment performance and annuity rates, if selected under the new regime, all have a significant impact on retirement income and cannot be predicted.
There is also a discrepancy between the way that the LTA will affect those in a defined benefit (DB) pension scheme and a defined contribution (DC) pension scheme, which favours those in DB schemes. A member of a DB scheme can receive more pension before hitting the LTA than an individual with a DC arrangement. In the DB market the assumed equivalent cost of £1 per annum of pension for life is £20, however under the present system it could cost £30 or more to buy the same £1 of annual pension on the open market.”
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