The NAO today estimated the impact of the £1.4 million pensions lifetime allowance.

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.

In its 2003 consultation document ‘Simplifying the taxation of pensions: the Government’s proposals’ the Government proposed that from April 6th 2005 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.

John Ball, head of executive reward consulting at Watson Wyatt, said: “The NAO’s findings look reasonable to us.”

But he cautioned: “Any estimate of the number of those affected by the lifetime allowance is very sensitive to assumptions. For example, our research shows that a one per cent increase in annual real salary increases could double the number of people affected.”

“The NAO figures do not allow for part of the pension to be commuted for a tax-free lump sum. But if you allow for the effect of commutation – and most people do take the maximum tax-free lump sum – the numbers affected could actually fall by as much as a half, back to within the Government’s original estimate of 5,000. In effect, the overall limit is not £1.4 million, but around £1.7 million.

“Watson Wyatt’s research also finds that about 25,000 additional employees may be affected in the future, although again this is very sensitive to the assumptions made. This is broadly consistent with the Government’s view that 1,000 additional people a year will hit the limit.

“While the number of people affected is fairly low, for those people it will be significant. We estimate that the average recovery charge would be in the order of £100,000.”