Pensions freeze will punish lower earners

Click to follow

The Government's decision last week to freeze the lifetime limit on how much people are allowed to save into their pension will have unforeseen consequences for low and middle-income Britons, a financial expert has warned.

From 2010, the amount of cash that individuals can save in a pension over their lifetime will be capped at £1.8m. Very few people, of course, will put away anything like this much but the new limit will still have consequences for people with far smaller savings. "You are allowed to cash in a pension from age 60 as long as it is not larger than 1 per cent of the lifetime limit," says Tom McPhail from independent financial adviser Hargreaves Lansdown. "So the decision to freeze the limit will bar many people on lower incomes from cashing in relatively small pensions."

In effect, Britons with pensions worth more than £18,000 – 1 per cent of the £1.8m limit – will have to keep them invested and won't be able simply to take the fund back as a lump sum.

"When the lifetime pensions savings limit was introduced, the Government said it would increase it gradually over its first five years. Now we are being told it will be frozen from 2010. This is a breach of trust," adds Mr McPhail.

The decision can be seen in the context of a pre-Budget report that was meant to make wealthier Britons pay more. The most stark indication of this new policy direction was the Government's move to introduce a new 45p top rate of tax from 2010.

"I'm sure Labour MPs are pleased to see the lifetime limit frozen as it's part of the general push to make the rich pay more," says Mr McPhail. "But like the 10p tax debacle, what they don't realise is that it will also have a negative impact on those much further down the scale – ordinary people who would like to cash in a pension but now won't be able to."

Looking for credit card or current account deals? Search here