Three key challenges when scrapping the Lifetime Allowance

Here is what I have been battling with. Any change to pension framework including scrapping the Lifetime Allowance will need to address three big points:

It has to be tax neutral

It has to be socially acceptable

It has to be practical to implement

In reverse order, to be practical to implement essentially means it has to be a simple system that doesn’t come with a raft of transitional rules. So by scrapping the lifetime allowance we will also need to scrap all (or most) of the current transitional protection rules. This has to be done in a way that is built to last – no good scrapping the lifetime allowance and then introducing something else a few years down the line.

I mentioned in an earlier post the difference in outlook between someone who has worked hard to earn their money, or invested with skill (and a slice of luck), and someone who has won the lottery. The government need to accept that some people will have large sums in their pension but along the way that means they have worked hard or invested well. The government has had its opportunities to make good investment decisions (selling its gold, selling back stake in RBS, selling properties etc).

Tax neutrality is the hard nut to crack. A straight removal of the lifetime allowance will result in reduced revenues as there would be no lifetime allowance charge, potentially increased tax relief if higher contributions are made, and lower income tax take if there is an increase in the pension commencement lump sum.

I have some thoughts, which I am working on.

I'd love to hear your thoughts

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