Bee-Mail - 21 December 2010

Reduction of the Lifetime Allowance 

This is a long story, but I'll try to put it in a nutshell for you. For the last half century or so we had a pension system where individuals, employees and employers could contribute to pensions and get tax relief for doing so; tax relief up to a point. There were restrictions as to how much tax relieved pension a person could be entitled to and also restrictions on the amount of tax relieved contributions that could be made. Over the years these limits on either benefits or contributions, and sometimes benefits and contributions changed, as most pension things do, like the wind.

The constant change eventually led to our pension system in the UK being described as 'the most complex in the world' as we ended up with eight completely different full-blown tax regimes applying to different people depending on when they joined occupational pension schemes or started saving into individual pension plans, or whether they wore brown shoes at weekends and all that kind of nonsense. It was good for the people who set pensions exams and kept the industry newspapers and periodicals going with a constant stream of complex and arcane issues to write about all the time, but for Joe and Josephine Average the pension system was looking a bit on the fiddly side and it was becoming possible people might be put off pension saving because it was simply too hard to think about.

The big reforms that came into being in 2006, on a day dramatically referred to as A-Day, simplified all the complexity with the same finesse that Alexander used to unravel the Gordian Knot; our entire canon of pension legislation was binned and we got a new simple set of rules and regulations that anyone could understand.

Instead of all the palaver of different tax regimes and different tax reliefs for different people we got a shiny new post-2006 system where everyone had a maximum pension pot in which they could accrue tax relieved pension savings. The idea was that everyone got the same maximum lifetime pension pot, called their Lifetime Allowance, and that by and large no-one would care how quickly or how slowly they filled up their pot; once full that was it. Simple.

Well that was the idea anyway. But like most simple pension ideas it didn't take too long to start getting complicated again. Before long we found that there were all sorts of additional rules added to limit the contributions some people could make, or employers could make on their behalf, and before we knew it we were back to the time honoured complexity we were used to. Not the same complexities we had before, but new complexities to replace them. Once again our financial newspapers and journals and, these days, websites are buzzing with detailed analysis of each and every turn of the complexity dial – just like the good old days.

The latest turn of the complexity dial comes as the Government people are reducing the Lifetime Allowance from £1.8 million to £1.5 million. This is something that many of you will know has been talked about a lot this year and it is planned for it to happen on 6 th April 2012, just six short years after the 2006 reforms. As you'll doubtless appreciate such fundamental change as this will raise many questions in people's minds so it is useful that the HMRC people have published a comprehensive document outlining the changes and the effects they may have on different people in different circumstances. A link to a downloadable copy of this 32-page document is appended to the end of this Bee-Mail for you to read and inwardly digest over the coming festive break. I'll personally be using it for a pension quiz I've put together for our friends and relatives who've drawn the short straw and are joining us for Christmas Dinner on Saturday; something that's simply bound to go down well. Maybe some of you will be planning something similar?

Anyway, when reading the document, or basing a quiz on it or whatever, please bear in mind that at this stage such a guide is only a draft of the guidance that will eventually be published when the legislation is eventually changed. It is obviously at this stage only based on the draft legislation that has been tabled and could therefore be subject to change. That said, it gives a good indication of what the changes may well mean and has some very good worked examples and Q&As and stuff, so it's well worth the read. The link's here if you want to get to your own downloadable copy: Pensions: Reduction of the lifetime allowance

Oh, and Happy Christmas; have a good one!