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Is The Chancellor Punishing Successful Investors?

Most people won’t be affected by Chancellor George Osborne’s move to slash the lifetime pensions allowance from £1.25m to £1m, so most people won’t care.

Few people, me included, expect to have anywhere near that amount in their pension pot.

Which is one reason why the Chancellor thought this would be a good way of funding his fiscally neutral Budget.

The other reason was petty politics. Labour’s Ed Balls had planned to raid pensions in exactly the same way, to fund a cut in tuition fees. He can’t now.

Power Grab

So the move was good politics, but really bad policy if you understand the importance of encouraging people to save for their future.

First, it confirms that politicians view the nation’s pension savings as a pot they can raid whenever they need to fund a vote-grabbing policy. Remember Gordon Brown’s infamous £5bn a year pension tax raid?

This isn’t Mr Osborne’s first assault on the lifetime allowance either. It actually stood at £1.8m in 2011, he has cut it by a total of 40% since then.

He has also slashed the maximum you can save in a pension each year from £255,000 to £40,000, a massive 84% cut.

Why bother saving when the rules are changing all the time?

Tax On Success

Most of the people affected will be in public sector final salary schemes, notably senior doctors, policemen and civil servants.

But many will also be private investors putting money into a personal pension, possibly on top of workplace scheme.

And the crazy thing is that Mr Osborne isn’t just hitting people who go to the trouble of investing for their future, he is punishing those who do it successfully.

Cap That

The new £1m lifetime allowance isn’t a cap on how much you can pay into a pension, but the total value of your pension including investment growth.

That means it doesn’t hit everybody equally, it hits successful investors hardest of all.

Be The Worst You Can

The Motley Fool exists to encourage people to be the best investor they can. But the new reduced lifetime pension allowance does exactly the opposite.

Because the better you are, and the more your pot of money grows as a result, the closer you get to that lifetime cap.

And if you exceed it, you risk hefty tax charges on the surplus, which could be as high as 55%.

Limiting the amount you can invest into a pension and claim tax relief is fair enough. Setting a lid on how much your pension can actually grow is daft, because it turns investment winners into losers.

It is possible for ordinary people to make a million by investing in the stock market, through a combination of pensions and Isas.

You will be surprised to discover how ordinary people can become astonishingly wealthy by investing in stocks and shares.

This FREE Motley Fool report 10 Steps To Making A Million In The Market sets out how investing in stocks and shares over the long-term can make you rich.

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