At a very basic level they are tax-efficient savings schemes that provide a long-term benefit with an in-built legislative ‘motivation’ to not dip into the funds before you really need them for retirement.
Pensions provide a ready-made pot of funds for the government to take a bigger cut of cash from as years go onThe trouble is that over the years, governments of various colours have interfered with pensions legislation to such an extent that the growing layers of complication mean mere mortals struggle to make much sense of what should be a relatively simple product.
Pensions provide a ready-made pot of funds for the government to take a bigger cut of cash from as years go on, and the latest figures show clearly how much this has grown in the last decade.
The latest figures from HM Revenue & Customs show the number of people who have fallen into the tax trap of the annual allowance is 26,550 for 2017-18, up from 18,500 in the previous year.
That is a rise of 43.5 per cent in just one year, with the value of annual allowance breaches reaching £812m for 2017-18, up from £578m the year before according to self-assessment data.
When you look back further though, the rise in the figures over a longer period make shocking reading.
In 2007-08 the number of people who exceeded the annual allowance was just 230, with a value of £3m.
But back then the annual allowance was £225,000. Now it is just £40,000, and this is one of the primary reasons for the rapid acceleration in annual allowance breaches.
There is an obvious desire for any government to be able to increase the tax take from its population with the least amount of fanfare, but when you consider what is happening in the UK as a whole, it does not make a lot of sense to target pension savings for this.
For example, consider the difficulties in the social care sector.
The £1.5bn announced by Sajid Javid in the Spending Review for social care – £500m of which would need to be raised by local authorities through an increase in council tax – does not even come close to resolving the social care funding crisis according to the British Association of Social Workers.
In a statement, the BASW said the money was “merely a sticking plaster for a long-term funding and structural solution needed for adult social care – which is suffering a reported £2.5bn shortfall just to stabilise the sector”.
That £2.5bn figure – or £2.6bn according to other reports – comes from the Local Government Association and is the expected shortfall in funding for adult social care by 2020.
Of course, the time when most adult social care is needed is as we get older and become infirm, precisely when having more of our own money could go a long way to help reduce the social care funding shortfall.
How social care is funded is a point for another time, but at the very least having a higher proportion of funds available for ourselves means we would have more choice over how our care is dealt with as we get older.
So, the fact that the value of annual allowance breaches has risen from £3m to £812m in a decade, according to the self-assessment data, with the commensurate tax charges that come along with that, means pensions are being hit hard.
On average these people are paying tax on an excess contribution of £30,600.
Pension schemes have already paid £173m in charges for payments over the annual allowance in 2017-18, but this amounts to just 10,750 individual charges.
The other self-assessment charges will wash through the system in due course.
In addition, £185m in charges has been paid on amounts in excess of the lifetime allowance in 2017-18.
The annual allowance is complex – people are certainly not volunteering to be hit with a tax charge by paying too much into their pensions – and along with the lifetime allowance it is doing little to encourage greater pension saving.
On the one hand you have auto-enrolment, which is designed to encourage pension saving for the masses, but on the other you have these additional complexities that have the polar opposite effect.
It is no wonder people are confused about pensions and how pensions work, you need to be highly qualified or especially interested in them to understand exactly how to make the most of them.
These mixed messages do not help encourage people to put more money into pension schemes – and let us face it, very few people wake up in the morning and suddenly think they need to put money into a pension.
This is a product that needs to be ‘sold’ to people rather than being bought, and the more complex and likely to create additional involvement with the taxman pensions become, the less likely people are to use them.
Which is a shame, because pensions are still one of the best ways to save for your retirement; it is just that thanks to the government we as an industry have to do more than ever to convince people of that.
Alison Steed is a freelance journalist
