There is a wonderful irony about the appointment of Baroness (Ros) Altmann as pensions minister.
After several years of politicians using pensions as a political football, a pension specialist has been appointed as pensions minister. Not that Steve Webb was not very strong on pensions after five years in the job, but he was primarily a politician. In one of Mr Webb’s last interviews before the general election he said that he felt that the Lifetime Allowance should be abolished. There are many both inside and outside the pensions world who agree with him.
Before 2006 there were different rules for different types of pensions. Occupational schemes generally allowed unlimited contributions, but limited the benefits payable in terms of both tax-free cash and pensions. By contrast, personal pensions and their predecessors, retirement annuities, limited contributions, but only limited benefits in terms of the maximum tax-free cash which could be taken.
The rules for maximum benefits were complex before 1987, when the government introduced a new regime that applied to people who joined schemes after the Budget in March – except for some people who could qualify if they joined before June. Then in 1989 there was another Budget and another new regime, this one including an ‘earnings cap’. So complex rules were made more complex.
Meanwhile, contributions to retirement annuities were subject to age-related limits, while contributions to personal pensions were subject to different age-related limits. And contributions to personal pensions were also caught by the earnings cap, but those to retirement annuities were not.
And after 2001, personal pensions could not use ‘carry forward’ of unused relief, or ‘carry back’ of contributions, but retirement annuities could. After 2001 personal pensions could use ‘basis years’ to calculate the maximum contributions.
It was clear that simplification was called for, and following two consultations in 2002 and 2003, legislation was passed in 2004 to bring about this ‘simplification’. In future there would be one set of rules for all pensions, and these would be based on a maximum total ‘fund’ of £1.5m for all pensions. The £1.5m LTA was increased by pre-set amounts to £1.8m by 2010.
Whereas before April 2006 excessive funds had to be returned since that time, because there is no limit, there can be no return; but instead there is a lifetime allowance charge. This is 55 per cent if the excess is taken as cash or 25 per cent if it is taken as taxable income, so that for a 40 per cent taxpayer the outcome is the same.
As well as introducing the LTA, simplification also saw the introduction of the annual allowance. People questioned the need for an annual allowance alongside the LTA, but as the initial AA was £215,000 and it rose by 2010 to £255,000 this was not a big issue.
Then in 2012 a change of politicians meant a change in pension rules, with the LTA cut to £1.5m and the AA being slashed to just £50,000 – but with new carry-forward rules that got some people back to £250,000 by closing pension input periods early. It is difficult to believe that simplification could have spawned anything as complex and confusing as PIPs.