The recent Budget announcement by the Chancellor that he would reduce the Grand Old Duke of Pensions - the lifetime allowance (LTA) - to £1m from 6 April 2016 will mark the eighth change in the LTA since its introduction in 2006 and this excludes personalised LTA afforded by certain forms of protection. When first introduced, the legislation allowed for a gradual increase from £1.5m to £1.8m with the intention to review every five years with the perception that it would continue to increase. How wrong we were!
We should, by now, be inured to the idea of Chancellors 'tinkering' with pension legislation each year, however, it still creates something of a headache when trying to advise clients around retirement wealth planning. Post the Budget announcement, there were various pronouncements over how this was another 'kick in the teeth' for pension planning, often with comments citing the various senior public sector employees who are going to be seriously impacted by the reduction ... call me bitter and twisted, but we are talking here about people enjoying 'state funded' final salary pension benefits of index linked pensions of £50,000+ with spouse and dependants benefits thrown in for good measure.

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Compared with the majority of people in defined contribution arrangements (see the table below from the Office of National Statistics Pension Trends 2013 Edition), these people have never had it so good (paraphrasing Harold MacMillan's famous quote). Why then do we get so hung up on the reduction in LTA?



Well, as advisers there is a natural tendency to focus on high net worth individuals, and these are the type of people who will potentially have money purchase arrangements that have LTA issues. The Wealth and Assets Survey 2014 from ONS implies that from the 2010-12 data it is only the top percentile that have average total household wealth (including private pension wealth) approaching £1m, and the Chancellor himself stated that the reduction in the LTA will only affect 4% of people with pensions. For an individual to accrue a money purchase pension fund of £1m they would have to make gross monthly pension savings in excess of £650 for 40 years; I don't think there are many 25 year olds who could afford that level of pension savings. On the other hand, they may be able to achieve the £1m pot with lower contributions if they are prepared to take greater investment risks with their fund.

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I fully understand there is a finite pot of money to go around; what the Chancellor gives with one hand he invariably has to take with the other, and the LTA is a low hanging fruit which is unlikely to affect the populace. That said, with greater restrictions now on how much tax relief is available on pension contributions and those having built up large pension fund having already taken some form of protection I still believe scrapping the LTA altogether would make life so much easier. Obviously I will not be getting my wish but I can guarantee that many senior civil servants may wish that I did.

Neil MacGillivray is chairman of the Association of Member-directed Pension Schemes and head of technical support at James Hay Partnership