PENSIONSANDSAVINGS.COM

• Great to hear that the Chancellor is planning to finally increase pension tax allowances.  
• Chancellor should abolish the ludicrously complicated Tapered Annual Allowance.  
• and increase the limits for Annual Allowance and Lifetime Allowance.  
• Current tax rules have turned a tremendous workplace benefit into a workplace penalty – driving early retirement and reduced working hours for many senior staff in the NHS

I hope the rumours of changes to pensions tax allowances in the Budget will prove correct: Pensions are a brilliant product and a really valuable workplace benefit, especially for public sector workers. They offer significant tax advantages and an opportunity for better later life. The cost of pension contributions and tax reliefs run to tens of billions of pounds every year, so it is important that this system works well to deliver value for taxpayers and citizens.

Unfortunately, ludicrously complex tax rules can penalise senior staff for taking on extra shifts or working longer, leading them to reduce working and hours retire early: The Treasury has consistently tried to reduce the generosity of tax reliefs on pensions and, in recent years, has kept cutting the amounts that higher earners can contribute, supposedly to save money.  Above average earners can face a range of allowances that hit middle-ranking and senior staff and impose punitive rates of tax if they go over the limits. Many of the most valuable staff are now frightened to do extra shifts or are being told that retiring early will mean they can escape the tax penalties. This undermines the rationale for tax-favoured pension saving and, because allowances have not been increased and the calculations are negatively affected by inflation and other complexities, the Chancellor is right to seek to urgently change the limits.

The Tapered Annual Allowance should be abolished: The complexity of the calculations for the Tapered Annual Allowance – and impossibility of knowing in advance of the tax year-end how much the Annual Allowance for the current year actually is – have resulted in higher paid staff in Defined Benefit schemes like the NHS receiving sudden demands for thousands of pounds from HMRC. This shock has resulted in senior consultants or nurses being asked to pay more in tax than the extra they earned for agreeing to work extra hours. Unsurprisingly, they have decided they will refuse additional work, even when the NHS desperately needs this to be done. Despite changes to tweak the Tapered Annual Allowance in recent years, it is just far too complicated and should simply be abolished, leaving only an Annual Allowance limit. The NHS relies on quite a considerable amount of overtime work from senior staff, and the operation of the taper has put that at risk.

Annual Allowance should be increased – perhaps to £50,000: Given that the Annual Allowance has been cut significantly in recent years and, in light of salary inflation, the Chancellor should agree to increase the Annual Allowance, enabling more people to increase pension contributions and build up a better pension as living costs rise. Raising it from the current £40,000 a year to £50,000 a year would help more senior staff accrue better pensions.

Lifetime Allowance should be increased – perhaps back to £1.5million: Up to 2012, the Lifetime Allowance was £1.8million. It was then cut to £1.5million and has been cut further several times, now being little over £1million. Given the need to encourage domestic long-term investment, increasing the Lifetime limit significantly could help more people build a better retirement and make more funds available for domestic investment.

Encourage pension funds to invest in British start-ups:  The Chancellor might also consider allowing some investments to be excluded from the Lifetime limit, such as small UK based start-ups or infrastructure and social housing, which could also add to the pool of domestic capital to boost green growth.

Particular problems in the NHS justify abolishing the Tapered Annual Allowance:  The tax rules have compounded the staffing crisis in the NHS and already driven some of the most experienced and valuable staff out of employment, or away from carrying out extra duties. A major stumbling block is the “taper” that was introduced in 2016, which effectively means that as earnings go up, the amount of money that can be saved in a pension tax free goes down. Many of those affected cannot be replaced by locums, as they have unique experience and long-standing expertise in the NHS, so the loss of their extra work is a risk to patient care and quality of service, as well as adding costs.

Government’s description of how the taper works is set out here: https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance .

Unless you are a pensions professional, you will find it bafflingly complex. Surely we want senior NHS staff to be medical experts, not pension experts. That also applies to senior employees elsewhere.

Tapered Annual Allowance is flawed due to its complexity, unfair cliff-edge and retrospection in Defined Benefit schemes:

Retrospection – The convoluted taper calculation rules mean you cannot see what your reduced Annual Allowance actually was until after the end of the tax year, and you also do not know how much you will have been deemed to have ‘contributed’ to the scheme until after it is too late. In a DC scheme, the contributions are expressed as a sum of money that is more transparent, whereas in DB schemes, the calculations are based on different accrual rates and adjustments for inflation, requiring accurate information from the pension scheme and knowledge of these complex rules. Indeed, it is impossible to plan the pension contribution and your earnings precisely. A financial adviser who specialises in tax and pensions can help you make an informed estimate, but you may not have final figures for the deemed contribution until after the tax year has ended.

Cliff-edge – the reduced Annual Allowance depends on both ‘threshold’ and ‘adjusted’ income, so earning just an extra £1 can suddenly tip senior workers over the limit, which incurs thousands of pounds in taxes.

Complexity – it is far too complicated, particularly for final salary-type (Defined Benefit) scheme members to work out what their actual tapered Annual Allowance will be. Many people don’t realise just how difficult it is. To calculate whether any tax penalty is payable, means working out four items, none of which is easy.

1. Net income for the past year (all earnings and unearned income, including benefits in kind, so not just their earnings, but also includes dividends, savings interest, buy to let property, plus their own and the employer pension contributions).
2. Their and the employer’s ‘assumed’ pension contribution – this is an estimated figure, which is estimated as the growth in value of their Defined Benefit pensions over that year, taking account of inflation changes and scheme rules.
3. ‘Threshold income’ (this is net income less the amount of their and the employer’s pension contribution). This is a stark cliff-edge. Doing a little overtime, or receiving a bonus, could just tip them over the threshold limit and that triggers thousands of pounds in tax. They will pay far more than any earnings for that shift.
4. ‘Adjusted income’ (which is the ‘threshold income’ plus the amount of pension increase they are assumed to have earned, which they can calculate from their pension statements and the calculations outlined above).

Every one of these steps is complicated to work out and some cannot be known until after the tax year has ended, so it is not possible to properly work out whether taking on one extra shift is going to tip them over the edge into the tax penalty territory.