“Two things are infinite: The universe and human stupidity; and I’m not sure about the universe.”
So Albert Einstein is supposed to have said but probably didn’t. Following the 15 March Budget Statement however, we can potentially add the amount of pension savings an individual may accrue in their lifetime to the list of infinite things.
As ever, even before it was presented to Parliament there had been considerable speculation about the Budget’s contents. I mentioned in a recent article that it was widely thought that the Chancellor would take the opportunity to announce measures intended to help encourage people back into the workforce or to remain in employment. In the event, Jeremy Hunt’s Budget Statement included a raft of measures aimed at doing just that, ranging from an apprenticeship programme for older workers to the extension of childcare funding to working parents.
There had also been suggestions that the government might be considering bringing forward its plans to increase the state pension age to 68, but on the day, there was no mention of this and from a pensions perspective the most significant (and potentially most controversial) proposal was the announcement that the Standard Lifetime Allowance was to be scrapped.
For those who remember the background to its introduction, or who are interested in such things, the Standard Lifetime Allowance was part of a significant re-write of pensions and tax legislation that came into force on 6 April 2006 – or ‘A-Day’ as it was commonly referred to. The A-Day changes followed a white paper and were meant to provide pension scheme members with ‘simplicity, security, and choice’ in respect of their pension arrangements.
The Standard Lifetime Allowance was originally set at £1.5 million and scheduled to increase each year to take account of inflation. By 2010/11 it reached its peak at £1.8 million before subsequent governments began reducing it: first to £1.5 million in 2012/13, then to £1.25 million in 2016/17, and ultimately to £1 million in 2016/17. From 2017 onwards a series of small increases was made to the cap until it reached £1,073,100 for 2022/23.
Pension scheme members who accrue funds beyond the cap are liable to a tax charge of 55% on the excess. When the cap was first introduced scheme members whose pension funds were already greater than the cap were able to apply for what’s known as ‘enhanced protection’, in order to avoid triggering a tax liability; with every subsequent reduction in the cap additional forms of protection were introduced. The result was effectively a ‘hodgepodge’ of different caps for different scheme members, far from the concept of ‘simplicity’ that the A-Day changes were aiming for.
Another consequence of the reductions in the cap was the perception that senior personnel, particularly in the NHS, were leaving employment rather than running the risk of incurring a tax liability. Indeed, Mr. Hunt himself flagged this issue as one of the reasons why he was proposing abolishing the cap in the hope of encouraging senior, experienced doctors and nurses to remain with the NHS.
Responding to the Budget, the Labour Party has suggested that it would have specifically targeted those in the NHS rather than abolishing the Standard Lifetime Allowance across the board for everyone and has expressed concern that the change unfairly benefits those who are already wealthy.
If a change in government takes place following the next general election it seems likely that the Standard Lifetime Allowance may be restored, and the various forms of protection re-introduced – potentially with the addition of yet another new form of protection for funds accrued in the interim.
In an article last year, I discussed some possible reforms to UK pensions including the abolition of the Standard Lifetime Allowance but had envisaged this as a subject for discussion for the time being. Following the covid pandemic, it seems clear that working patterns have changed along with people’s attitudes to work/life balance and their priorities. The pandemic may have affected future mortality expectations and long-term sickness rates and created a need for greater flexibility for people to access their pensions.
If so, rather than piecemeal changes on an ad hoc basis, what may now be required is a full review of state, occupational and personal pensions in the UK, to determine whether the system remains fit for purpose. As Einstein said (and in this instance may actually have said), “we cannot solve our problems with the same thinking we used when we created them.”