No aspect of the Inland Revenue's proposals for simplifying the taxation of pensions has attracted so much controversy as the level of the Lifetime Allowance, and Government estimates of the numbers likely to have accrued pension rights in excess of this level at 'A-Day' or in the years following. Reacting to the criticism that these figures were unduly low, in his Pre-Budget report on 10 December 2003 the Chancellor of the Exchequer specifically asked the National Audit Office to consider and report this month on three questions:
1. Whether it is factually accurate that the £1.4 million 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 £1.4 million 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.
Today the NAO published its report, which broadly backs the Government.
Q1: NAO answer: Yes. (Whether at any moment an annuity of two-thirds of the cap can be purchased with £1.4m is another matter, the NAO acknowledges, noting that movements in the annuity market since January 2002, when £1.4m allegedly was enough, have significantly increased the amount required.)
Q2: NAO answer: The estimate of 5,000 people is at the lower end of a range of reasonable estimates. Sensitivity testing of the Revenue's models using the proposed 20:1 factor and assumptions more closely tailored to the attributes of high earners gave figures consistent with an estimate around 10,000. Other evidence is consistent with an estimate of around 10,000. However, great uncertainty attaches to any estimate of the number of people likely to have funds in excess of £1.4 million at A-day.
Q3: NAO answer: 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. In particular: the evidential base for the estimate of 1,000 additional people a year with funds exceeding the allowance is thin and based on a number of assumptions and roundings which significantly affect the outcome. However, evidence from a survey of major companies, the current pensions in payment data and other evidence does not discredit the Inland Revenue's estimate.
The NAO adds that these figures are not directly comparable with much higher industry estimates of the numbers who might be affected by the Lifetime Allowance over the next 40 years. This is because they are calculated on different bases - although the NAO concedes the calculations are nevertheless "reasonable".
In the overall picture, it seems the discrepancy identified by the NAO is sufficiently modest to make it unlikely the Chancellor will not press the button for the new tax regime when he presents the 2004 Budget on 17 March.
Footnote
The survey of major companies mentioned above was conducted in February 2004 by the Hundred Group of Finance Directors. It sought information about the number of members who might be affected by the lifetime allowance. They did this by requesting data from 100 major organisations (mostly FTSE 100 companies) about the number of active and deferred members of defined benefit schemes who had joined prior to June 1989 and whose accrued pensions are £50,000 or greater, broken down by age 24. The survey also asked for details of the number of active and deferred members of defined contribution schemes whose accumulated fund was £1 million or greater. In a delightful example of British understatement, the NAO says it "agrees with the Hundred Group's view that the members they surveyed may not be representative of the UK pensions population."