How to navigate the pensions tax landscape since freedoms

  • List what changes in the tax landscape mean for clients in decumulation.
  • Identify why retirement is changing.
  • Describe why annuities are still an option for clients.

Exceeding your capped drawdown maximum in a given year automatically defaults you into flexi-access drawdown, triggering that new MPAA reduction. Most drawdown policy providers carry out switches to the flexi-access drawdown arrangement free of charge today.

• The annual allowance has also fallen and been further reduced by tapered annual allowance.

If you are a UK taxpayer, in the tax year 2018-19, you will get tax relief on pension contributions of up to 100 per cent of your earnings or a £40,000 annual allowance, whichever is lower. This number was £50,000 until 2014-15. Increasing numbers of individuals are now exceeding their annual allowance.

HM Revenue & Customs figures from September 2018 show that for the 2015-16 tax year, total annual allowance breaches cost UK taxpayers £179m. This jumped to £561m in 2016-17, in the year the tapered annual allowance for high earners came into effect.

While the government does not separate how much of the tax revenue came from high earners on a tapered threshold from revenue generated by the standard annual allowance, it suggests the taper rules brought in from April 2016 may have had a significant impact on the tax take.

The tapered annual allowance for high earners means high earners have less than £40,000 annual pensions contribution allowance – tapering down to a mere £10,000 with total earning levels. This calculation is so complicated that the former pensions minister, Steve Webb now advocates ending the taper. 

• The lifetime allowance has been one of the most volatile features of the pensions simplification regime.

Introduced back in 2006 with a £1.5m starting point, it has been as high as £1.8m and as low as £1m, making planning difficult for advisers and clients alike.

For next year (2019-20) it will be £1.055m. So, it increasingly hits the mass affluent, not just the rich. The additional tax charges on those exceeding the LTA now raise over £100m per year for the Treasury.

The LTA charge applies to members who have benefits in excess of the LTA when benefits are taken.

The LTA charge can apply in either of two ways or a combination of both depending on how the excess benefits are taken. The charge is: 25 per cent of any income taken, and 55 per cent if taken as a lump sum.

Take another look at annuities

I mentioned earlier that only about one-in-10 DC pension holding retirees are currently buying annuities. Many advisers are still steering clients away from buying annuities post-pension freedoms, often because they think annuity rates are so poor. However, it is worth looking again.

Recent data from Moneyfacts shows the average annual annuity income rose by between 1.4 per cent and 4.8 per cent in the first half of 2018. So, it is up 14.6 per cent since the EU referendum vote back in June 2016 and now sits just 1.2 per cent lower than when freedoms came in the year before that.