Flat-rate tax relief proposals have been shelved once before, and I hope they stay there – otherwise we could end up with not just a two-tier pension system, but a multilayered and even more complex tax relief system.
Annual allowance reduction
I would take a reduction in the annual allowance if it meant that the tapered annual allowance was abolished, but I can’t believe that is what is going to happen.
The annual allowance has reduced over the years from a peak of £255,000 down to what we have now, which is somewhere between £4,000 and £40,000 depending on how much you earn and what you have done with your pension benefits. The annual allowance was originally designed under the banner of pensions simplification and we are a long way from that now.
However, it is a relatively easy thing to do if you wish to reduce the tax relief that individuals are getting, which is why it has been hit more than once over the years, and why there is a process in place to recoup the tax relief for those that exceed it.
So if there is one change to be made by Philip Hammond, I feel this could be it. But I would very much hope that it doesn’t take place, unless the move also gets rid of the tapered annual allowance, the money purchase annual allowance, or both.
Lifetime allowance reduction
The lifetime allowance (LTA)generally gets a mention if you ask anyone about pension changes in the Budget, and this year is no different. But the fact that we are only a couple of years since the last drop, and that the allowance is currently on the increase, should be taken into account. Indeed, by the time this column appears, a further increase to the LTA for 2019-20 will have been pencilled in, because the rise is based on consumer price inflation in September.
The LTA is already very low, and many are being hit by charges when they access their benefits, when they reach age 75, or both. Reducing this further would certainly increase the tax take on pensions, but it wouldn’t do anything to encourage saving.
Should it happen, we would have to see another round of protections – such as fixed and individual protection – coming into force. Needless to say, this would continue to add complexity to the process of accessing benefits and testing the LTA. This is already a fairly poorly understood area outside of the financial services profession, and making it more complex will not help encourage saving.
Ever since pension freedoms came about, and with it the ability to pass funds down the generations tax-free, there has been a nervousness that these powers will be reversed.