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The Government’s estimates of the pensions lifetime allowance

Sir John Bourn, the head of the National Audit Office, today reported on the results of his examination of the Government’s estimates of the number of people who may be affected by the proposed introduction of a lifetime allowance for the amount of tax-privileged saving in a pension scheme. The proposed allowance of £1.4 million would replace the current complex tax arrangements for pensions. These include the so-called earnings cap that has applied to anyone joining a pension scheme since 1989.

The Government estimated that around 5,000 people will have funds exceeding £1.4 million – the proposed allowance – at A-day (6 April 2005, the proposed date of implementation) and would therefore be affected if it were introduced. They also estimated that in future around 1,000 additional people a year may be affected by the allowance, who would not have been affected by the earnings cap.

During 2003, some commentators suggested the number of people affected was much higher than the numbers quoted above, perhaps as many as 600,000. In view of this, in his Pre-Budget Report statement in December 2003, the Chancellor of the Exchequer asked the National Audit Office to examine the estimates and report before the 2004 Budget. He specifically asked the National Audit Office to consider:

  1. Whether it is factually accurate that the £1.4m lifetime allowance is, using a factor of 20:1 to calculate the capital value of a defined benefit pension, equivalent to the maximum pension available under the current occupational pensions regime which includes the earnings cap;
  2. Whether it is reasonable for the Government to estimate that around 5,000 people will have pension funds in excess of £1.4m at 5 April 2005;
  3. Whether it is reasonable for the Government to estimate that into the future, around
    1,000 people a year (in addition to the 5,000 immediately affected) may be affected
    by the lifetime allowance who would not have been affected by the earnings cap.

The National Audit Office’s main conclusions were:

Question 1: Relation between the earnings cap and the lifetime allowance

  1. It is factually accurate, assuming the 20:1 valuation factor suggested by the Government in the 2003 consultation document, that £1.4 million is broadly equivalent to the maximum pension allowable under the earnings cap. This means that those affected most by the proposed lifetime allowance are likely to be high earners who have not changed their jobs since 1989.

Question 2: A-day estimate

  1. Using the 20:1 factor proposed by the Inland Revenue for valuing benefits against the lifetime allowance, the estimate of 5,000 people is at the lower end of a range of reasonable estimates.
  2. Using assumptions more likely to be tailored to the attributes of high earners, and other evidence we examined, gave figures consistent with an estimate around 10,000.
  3. Evidence from a survey of more than 60 FTSE 100 companies is consistent with this estimate.
  4. Other different though reasonable ways of estimating the numbers, including the much higher estimates quoted by some commentators, are not directly comparable to either the 5,000 or the 1,000 estimate figures produced by the Government. They use different definitions of those affected and include large numbers of people already subject to the earnings cap (who are not included in the Government’s estimates), and they project up to 40 years into the future.
  5. Great uncertainty attaches to any estimates since there is no single source of data.

Question 3: Estimate of those affected in the future

  1. Even greater uncertainty attaches to projections into the future, which makes it even harder to provide a reliable estimate of the number likely to be affected.
  2. The estimate of 1,000 additional people a year with funds exceeding £1.4 million had a thin evidential base.
  3. However, other evidence, for example, from the survey of FTSE 100 companies, from pensions currently in payment, does not discredit the Inland Revenue’s estimate.

Notes for Editors

  1. In its 2003 consultation document ‘Simplifying the taxation of pensions: the Government’s proposals’ the Government proposed that from 6 April 2005 (A-day), a single lifetime allowance, of £1.4 million, will limit the total amount of an individual’s pension savings that can benefit from tax relief. The allowance will supersede all existing tax regimes for pensions, including the current ‘earnings cap’ regime for post-1989 schemes. Where an individual’s pension is not in the form of a personal fund, but is defined in terms of the benefits he or she stands to receive, a single factor of 20:1 will be used to compute the total fund to be assessed against the allowance.
  2. Press notices and reports are available from the date of publication on the NAO website,
    which is now at www.nao.org.uk. Hard copies can be obtained from The Stationery Office
    on 0845 702 3474.
  3. The Comptroller and Auditor General, Sir John Bourn, is the head of the National Audit Office which employs some 800 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

PN: 19/04