In a speech this week, Rishi Sunak said he believed we should all “be able to make decisions about how to save, invest or use the money we earn” and that it is “far better spent by individuals and businesses than government”.
We quite agree, Chancellor. A good place to start would be our pensions.
It is unsporting enough that the Treasury taxes pensions above £1,073,100 at an astonishing 55pc, lining its pockets with the hard-earned retirement savings of hundreds of thousands of workers.
But it is outright foul play that this lifetime allowance does not affect all savers the same way.
Most private sector workers today are already barred from more generous “defined benefit” pensions, which pay out an inflation-linked annual salary guaranteed for life.
Instead, they save into “defined contribution” pensions – invested personal savings pots that are vulnerable to market falls and have no guaranteed value.
These pots are harder to grow, as employers must pay in just 3pc of a worker’s salary, meaning the employee has to sacrifice much more than the minimum 5pc of their salary to amass enough savings. A civil servant putting in 5-7pc of their salary, meanwhile, enjoys employer top-ups of 27-30pc.
The salt in the wound of this stark inequity is the different way the lifetime allowance is applied. Although the tax-free limit is the same for both types of pensions, this figure is calculated for defined benefit pensions by multiplying the annual retirement income by 20.
This means a person could take an income of £53,655 a year before breaching the lifetime allowance. If they lived for 30 years, enjoying a total income of £1.6m, they would still incur no tax charge.
By contrast, a retiree with a defined contribution pension worth the maximum tax-free amount who bought an inflation-linked joint-life annuity would earn just £22,778 a year. Same lifetime allowance, less than half the annual income.
Put another way: a private sector worker would need to save £2.5m – with higher salary sacrifices and more investment risk – to be able to pay the tax charge and buy the same retirement income as a public sector employee.