Making allowances? The future of pensions tax

The annual allowance was originally set at £215,000 and the LTA was £1.5m, before increasing to £255,000 and £1.8m, respectively, by 2010. Both have subsequently been slashed; the annual allowance currently sits at £40,000, while the LTA is now £1.03m. Chart 1 shows how the LTA has changed in recent years.

Some adviser clients may have been insulated somewhat from these changes, thanks to a significant rise in the number of people using protection to guard against allowance changes. Data from Retirement Advantage shows that more than 60,000 used such methods in 2016-17, up from an average of 16,000 a year between 2013 and 2016. Chart 2 shows how existing LTA limits affect those with fixed protection.

The current situation means advisers have to navigate their way around a system that has become ever more intricate. But do they believe the TSC’s plans have merit?

Martin Bamford, a chartered financial planner at Informed Choice, says: “The combination of the LTA and annual allowance seems punitive, based on current rules. Of the two, my preference would be to see the LTA abolished, as it penalises investment growth. However, losing it at the expense of seeing a lower annual allowance would seem to discourage pension saving even further.”

Richard Ross, a chartered financial planner at Chadwicks, would rather see the annual allowance ditched.

He says: “While the current LTA is inconvenient for many of my clients – and, I suspect, the members of the TSC – no one with a £1m fund is likely to starve or be other than comfortable in retirement. The annual allowance unfairly discriminates against entrepreneurs. A typical business life cycle involves many years of tight cash, during which the immediate needs of the business will trump the longer-term imperative to fund a pension.

“When, or if, the business does eventually become cash generative, it seems a nonsense that there is no effective mechanism to materially make up lost time. Having an overall limit that all can potentially achieve seems much fairer than a de facto restriction that sees only middle managers and above in safe employment able to benefit fully from pension tax relief.”

Muddled thinking

A lack of consensus is something that has already stymied reform of pension taxation. 

In his 2015 Budget, Mr Osborne launched a consultation into whether there was a case for reforming pensions tax relief to strengthen incentives to save. This process raised concerns that the government was considering a ‘pension Isa’, effectively meaning savings would be taxed on the way in, rather than on the way out.