In the 13 years that have passed since the current pension tax system came into being on A-Day 6 April 2006, things seem not to have worked out quite as well as planned. To put it bluntly, the system is now a bit of a mess – it’s too complicated, widely misunderstood and not very consumer-friendly.
It’s not that there was much wrong with the A-Day changes, which were a big improvement on what had gone before, but what has happened since with a number of legislative add-ons plus constant tinkering with the rules has had a damaging effect.
Both the annual allowance and the lifetime allowance have been regularly cut back, leaving people unsure from one year to the next where they stand in relation to their saving plans.
The introduction of a Money Purchase Annual Allowance and a high-earners’ Tapered Annual Allowance have created particular problems. The MPAA, which was originally £10,000 and then reduced to £4,000 in 2017, is supposed to be aimed at preventing the over-55s from “double dipping” on pension tax-relief. In reality, though, the consequences for savers’ retirement plans are much more significant.
Drawing down even a single, small payment from a pension pot can severely limit an individual’s ability to continue saving into their pension at the level they need to for the remainder of their working life. This can result in their not being able to retire from work, due to a shortfall of funds, at the time they had originally planned to do so, with ramifications both for themselves and their employer.
The impact of the TAA on senior clinicians in the NHS has been well documented and shows the absurdity of the rules when a few hours of overtime working can generate unexpected tax bills amounting to thousands of pounds. Is it any wonder doctors are often refusing to work extra hours, with the NHS and its patients being the losers in consequence?
And at the other end of the income scale we have the ridiculous situation of low-paid workers whose pension contributions are processed through ‘net pay’ arrangements – those who earn less than £12,500 a year – missing out on the tax bonuses on their pension contributions simply because of the payroll system chosen by their employer. This is unfair and must be changed as a matter of urgency.
A recent, very well-written report from the Office for Tax Simplification picked up on many of these problem areas and made a series of very practical recommendations for potential changes. We can only hope the Treasury heeds their words. We need another A-Day as soon as possible. The next Budget would be a good place to set this up and get the ball rolling.
If you would like to speak with a financial adviser, please contact us on 0191 384 1008.