Pensions experts have raised concerns over the future level of the pensions lifetime allowance (LTA), after it was reduced to £1 million from April 2016.
The allowance – the amount someone can save into a pension pot and benefit from tax relief – will be reduced from £1.25 million next year, Chancellor George Osborne announced in the 18 March Budget.
Transitional protection for pension rights already over £1 million will be introduced alongside the reduction and the allowance will increase annually in line with the consumer price index from 6 April 2018.
Graham Vidler, director of external affairs at the National Association of Pension Funds (NAPF), said: “The Chancellor’s commitment to index-link the lifetime allowance from 2018 is welcome. But the question remains, what will the LTA be in three years’ time?
“Let’s hope past performance is not an indication of future cuts. The LTA has been cut by £0.5m in the last three Budgets, which, if repeated, would leave an LTA of £0.5m. This would buy an income of around £10,000 per year.”
The NAPF figure was based on the £500,000 pension pot of a 65-year-old married man who takes a 25 per cent tax-free lump sum (£125,000), leaving a pot of £375,000 with which to buy an income.
NAPF said that figures generated by the Legal & General annuity calculator showed the pension pot would provide an annual income of £9,780, based on linking to the retail price index and a 50 per cent income provision for the man’s spouse after his death.
The Budget also confirmed that people already taking retirement income through an annuity are to be given similar freedoms to access their cash as new retirees.
From April this year, from the age of 55, people with defined contribution pension savings will have much greater flexibility over the way they use their pension pots, enabling them to buy an annuity, take the whole amount as a lump sum or keep the money invested and draw an income from it, with the option of taking further lump sums.
In a move that Mr Osborne said would benefit five million people, from April 2016 people already receiving income from an annuity will be able, with the agreement of the annuity provider, to sell the income to a third party.
The Budget document said: “The proceeds of the sale could then be taken directly or drawn down over a number of years, and would be taxed at their marginal rate, in the same way as those taking their pension after April 2015.
“The government believes that for most people, continuing to hold their annuity will be the right decision. However, for others, this reform will allow them the flexibility to use the value of their annuity as they see fit.”
Currently people wanting to sell their annuity face a 55 per cent tax charge, or up to 70 per cent in some cases.
The government published a consultation on 18 March, which will run until 18 June, setting out the government’s proposed approach and seeking views on this.