Rather than talk about all aspects of the budget yesterday, I thought I would focus on one particular area – the reduction in the lifetime allowance from £1.25million to £1million. There has been a trend in recent years for the allowance to fall and the Chancellor has again chosen to reduce the burden on the public purse by reducing the total pension pot you can accumulate. Going back only four years the lifetime allowance was £1.8million.
To a lot of people this new £1million limit still seems high and it is set to rise with inflation but what does it mean to someone saving into a pension. If you are 30 years old then a monthly gross contribution of £1,197 would have you exceeding the lifetime allowance by the age of 65, assuming a 5% return. One of the great things about pensions is you receive tax relief on your contributions so for a 20% tax payer that is equivalent to a £958 monthly contribution or only £718 per month effective contribution for a 40% tax payer able to reclaim an additional 20%.
To put it another way, an employee with a £50,000 salary and a 12% employer contribution to a pension into which they make a personal contribution of 5% would see them exceed the allowance.
As you can see at these levels of contributions it is looking like a great deal more people will need to consider the lifetime allowance when it comes to planning for their future.
Here is a quick table courtesy of Prudential detailing the levels for 40 and 50 year olds:
| Age Now |
Cost @ 2% escalation |
less 20% |
less 40% |
|
30 |
£1,197 |
£958 |
£718 |
|
40 |
£1,940 |
£1,552 |
£1,164 |
|
50 |
£3,624 |
£2,899 |
£2,174 |
A final point – this is not to say that exceeding the lifetime allowance is a bad thing to do as it might form part of an overall strategy i.e. pensions which are very tax-efficient savings vehicles during their lifetime and an employer contribution may be money you wouldn’t receive otherwise.
As with all these things good financial planning is important and a pension should form part of your overall strategy!
