Scrap lifetime pension cap before limits hinder savings

Scrap lifetime pension cap before limits hinder savingsThe £1.5 million lifetime limit on pension contributions should be scrapped, urges investment firm Skandia.

The lifetime allowance cap is a barrier for retirement savers and penalises investment growth, says the finance firm.

Skandia argues that the cap may be designed to stop wealthy retirement savers from abusing the tax system, but also restricts pension saving for the less well-off.

The firm gives an example of someone starting a pension at 25 years old who intends to retire at 65.

If they invest £509 gross a month for 40 years – which is £363 net for a higher rate taxpayer – their pension savings could breach the current £1.5m lifetime allowance threshold by the time they reach retirement.

This level of contribution is assumed to rise by 3% a year, and an investment growth rate of 7% is achieved.

If growth is even higher due to good investment choices and a well-managed portfolio, then the investor will be penalised with a tax charge of up to 55% on any excess above the £1.5 million lifetime allowance.

The £1.5 million cap will impact an increasing number of retirement savers over time, especially if no adjustment is made for inflation.

In 40 years, the unadjusted threshold could equate to just £460,000 in today’s money, which would become a real barrier for savers.

Skandia’s Adrian Walker said: “The current annual allowance, set at £50,000, controls the amount of tax relief the government is prepared to give on pension savings. With this control in place, it is hard to see what rationale there is for a lifetime allowance. The lifetime allowance effectively caps good investment performance and will penalise those who have managed their investments well.

“Young people are being told to take responsibility for their future and start saving early towards retirement. If someone is successful in their career, and they are prudent in their savings, this cap is clearly going to penalise them.

“At a time when the government should be doing more to attract people towards saving for their retirement, they should look to remove barriers which could act as a detriment. “