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.”
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.
After a year of consulting the Treasury found there was no clear consensus for reform and the chancellor ditched the whole idea. Since then, reforms to pensions tax relief, in particular, have been mentioned again and again by the pensions industry as a possible risk for advisers and their clients.
The TSC says its rationale for proposing an overhaul was based on the fact that existing tax reliefs are “poorly targeted”, in that around 50 per cent of the total tax relief benefits goes to the top 10 per cent of income taxpayers, while roughly 10 per cent goes to the bottom 50 per cent.
The evidence of recent years is that political appetite for such a move is slim to non-existent. The other side of the argument is that the government is looking for areas from which it can raise more revenue. And despite both allowances having been slashed, the cost of tax relief has gone up from £28.4bn in 2008-09 to £38.2bn in 2015-16.