Should the UK scrap the lifetime allowance and rethink state pension age?

Earlier this year, it was reported that The Radical Road in Holyrood Park, Edinburgh, might remain permanently closed to pedestrians due to safety concerns.

For those who don't know, The Radical Road was built in the 1820s at the encouragement of Sir Walter Scott by unemployed weavers to provide them with paid employment and discourage them from participating in the civil unrest that had flared up in Scotland a few years earlier.

This had seen a series of protests and industrial actions by those seeking better living and working conditions and for more representative government; all very radical notions then, perhaps, but two centuries on, demands that seem much less controversial.

It's rare for pensions to stir the same passions or even garner much media attention, but some stories have recently appeared about pensions and their impact.

Should the lifetime allowance be scrapped?

One such concern is the Lifetime Allowance. This places a cap on the total amount of pension saving that an individual may make. It was first introduced in 2006, and initially set at £1.5 million. It was planned for this amount to rise annually, and for the first few years it did however, subsequent governments sought to reduce the amount.

The current cap stands at £1,073,000, and it now looks likely it will remain frozen at this figure until at least the tax year 2025/26. Pension accrued in excess of the cap is subject to a 55% tax charge, a considerable disincentive when people are being encouraged to save for their retirement.

There have been articles noting that freezing the cap at its current level is likely to penalise more savers. It has also created a situation in which some doctors and senior nurses are reportedly considering leaving the NHS to avoid triggering such a tax liability.

Many commentators, including Ros Altmann, a former Pensions Minister at the DWP, have recommended scrapping the cap altogether. There have been suggestions that this would benefit the better-off and that a level playing field for all is needed. Regardless of the merits of that argument, it's also true that the cap penalises those who have been shrewd or lucky with their investments or who started their pension at an early age.

As may have been seen with the NHS scheme, it can also affect individuals who are members of defined benefit schemes (both private and public sector) with lengthy periods of service, including many in the middle-income bracket.

A level playing field for pension saving is desirable, but there is an Annual Allowance that caps the amount individuals can save each year. A wholly separate Lifetime Allowance seems an unnecessary complication, and if its removal, among other things, encourages pension saving and helps avoid exacerbating staffing shortages in the NHS, then so much the better.

Is increasing the state pension age fair?

Another subject the press returns to periodically is the scheduled increase in State Pension Age and its fairness.

First, this was equalised at age 65 for men and women, then increased to age 66 for both. Further increases are scheduled with State Pension Age increasing to 67 on a phased basis between 2026 and 2028, and thereafter to 68, originally planned to happen between 2044 and 2046, but this may be brought forward.

The demographic changes behind these proposed increases are well known, and the UK is not alone in facing these challenges; other developed countries face the same problems and have adopted much the same solution. Whether the changes are 'fair' remains a heated topic on both sides; perhaps what's needed is a compromise.

Personal pensions allow individuals to draw their pension from a minimum pension age (currently 55 but scheduled to rise to 57). Similarly, many occupational pension schemes allow members to draw pensions before their normal retirement date, subject to an actuarial reduction to reflect the pension coming into payment earlier than planned and being paid over a longer period.

Our State Pension system already allows individuals to receive an enhanced pension if they postpone taking it; why not also allow for early retirement, subject to such a reduction, the Government Actuary's Department may recommend? That would allow individuals in hardship cases to draw at least part of their pension without having to wait until State Pension Age or apply for other social security benefits, and would address variations in life expectancy across the UK, a criticism frequently levelled against the proposed increases.

The United States Social Security Administration has successfully operated on a similar basis for several years, applying a "full retirement age" at which 100% of the federal old-age pension is paid, but allowing retirement from age 62 with a reduced pension.

Scrapping the Lifetime Allowance or allowing flexibility for the State Pension Age may not necessarily be the answers to current problems, but there's a debate to be had on these and other possible ideas. If history shows us anything, it's that sometimes ideas that seem radical now may, with hindsight, become commonplace.