Government body urges review of pension allowances

In Industry Insights by woateam

The government should consider applying different pension allowances to taxpayers depending on whether they are saving into a defined contribution scheme or a final salary plan, the Office for Tax Simplification has said.

In a 93 page report published yesterday, the OTS highlighted the issues many defined benefit members, such as doctors and consultants, have been facing with the annual allowance and the tapered AA.

It stated: “As the legislation produces distortions in behaviour that have negative effects such as those in the NHS, it seems sensible this legislation should be reviewed with a clear focus on its wider impact.”

Introduced in 2016, the tapered AA gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.

The taper means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.

The OTS also noted that for DC members it was difficult to forecast growth for lifetime allowance purposes, since these type of pensions not only grow through savings but also by the growth of the value of the investments in the fund.

The organisation also urged the government to review the money purchase annual allowance (MPAA) to consider if it is set at the right level given the “present potential for disproportionate outcomes”.

The MPAA, introduced in 2015 to coincide with pension freedoms, is the amount a person who has already begun drawing on their pension can pay back into their retirement pot in a given year without incurring a tax charge.

The allowance was cut from £10,000 to £4,000 in April 2017, following an announcement in November 2016.

Sir Steve Webb, former pensions minister and director of policy at Royal London, said the OTS report “makes a great deal of sense”.

He said: “It has highlighted several areas where the tax system causes complexity and unfairness for ordinary taxpayers. Ideally, the government would listen carefully to this report and make changes.”

According to Tom Selby, senior analyst at AJ Bell, the report “lays bare the nightmarish complexity facing savers attempting to navigate the UK pension tax system”.

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