Retirement plans
Could the ‘taper trap’ leave your retirement plans grounded?
Cuts to pension limits mean thousands more savers will fall foul of the restrictions and could be landed with large tax bills.
The combined weight of varying forms of tax relief on pension savings is an undeniable burden on the government. New fi gures indicate the net cost to the Treasury will be around £40 billion this year.1
Successive chancellors have sought to rein in the costs, with cuts to the amount that can be saved tax-effi ciently. Unfortunately, what we’ve ended up with is a maze of stringent and complex allowances for pensions – both on the amount that can be saved each year, and the total sum that can be built up over a lifetime.
What is the annual allowance?
The annual allowance is the total amount that can be paid into your pension each year for tax relief purposes. It was set at £215,000 when it was fi rst introduced in 2006. Today it sits at £40,000 for most people.
But some individuals can see it reduced to as little as £10,000 a year, thanks to the ‘tapered annual allowance’. This extra measure was introduced by former chancellor George Osborne to limit the amount of pension tax relief that can be claimed by high earners.
The taper reduces the annual allowance by £1 for every £2 of income – which includes earnings, rental incomes and other investment income – over £150,000.
There has been confusion over the tapered annual allowance ever since its introduction in 2016. The problem is that it’s an incredibly complex and confusing way to curb pension tax privileges at a time when the government itself is aiming for greater simplicity. There have been a number of unintended consequences too.
Take, for example, the perverse effect the taper is having on the NHS. Faced with the prospect of paying extra pension tax charges, a third of doctors have already reduced their work commitments, leaving patients with fewer medics and longer waits for treatment.
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The government has now come up with a fi x for doctors. But the problem is not confi ned to NHS employees, or even just public sector workers. Thousands of people in the private sector have been caught out by the clampdown on their pension allowances, and many more could be caught out in the future.
It has been reported that the number of pension savers that were hit with annual allowance charges increased year-on-year from 23,800 to 37,300 in 2017/18. And HM Revenue and Customs has already taken about £173 million in annual allowance charges from more than 10,000 savers this year.2
The culprit is almost certainly the tapered annual allowance and the money purchase annual allowance (MPAA) – yet another restriction on pension saving. Under the current MPAA rules, the annual allowance is reduced to £4,000 for anyone who has taken their retirement pot fl exibly.
Many across the political spectrum are now calling for wholesale reform. Baroness Altmann and Sir Steve Webb, both former pensions ministers, have demanded urgent action from the government. The pensions industry itself continues to lobby for greater clarity and simplicity.
Ministers have so far only committed to review the impact of the taper on the delivery of public services. There appears to be a lack of appetite to scrap the taper entirely. This means many high earners will continue to be left with the challenge of investing tax-effi ciently once their pension allowances have been exhausted.
In summary, adjusted income includes your taxable income plus the value of any pension contributions made by your employer, including any paid as a result of salary sacrifi ce.
Scott Symes
FPFS, Certs CII (MP & ER) Chartered Financial Planner 01202 951227 • 07885 899742
scott.symes@
sjpp.co.uk www.scottsymeswm.co.uk
1 HMRC Estimated Costs of Tax Reliefs, October 2019 2
HMRC, Personal Pensions Annual Allowance Statistics, 26 September 2019
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