The complexity of the tapered annual allowance is being felt by many, however the number of people affected is minimal, according to James Hay.
Speaking at James Hay’s retirement wealth symposium yesterday (June 12), Ian Linden, technical manager of pensions at James Hay, said that although calculating the tapered annual allowance was "extremely complicated" the amount of people actually affected by it was minimal in comparison to other allowances.
Mr Linden said an individual who is affected by the tapered annual allowance could potentially have 10,000 to 30,000 different outcomes in one year.
This is because to calculate whether someone is affected by the tapered annual allowance, adjusted income has to be taken into account which changes over the course of a year.
Introduced in 2016, the tapered annual allowance means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.
When asked how many people in the room had clients affected by the tapered annual allowance, out of a room of 200 financial advisers, almost everyone raised their hands, highlighting an ongoing issue.
However, when Mr Linden asked how many of the advisers had clients who were doctors only a handful put their hand up.
He went on the say the number of people affected by the tapered annual allowance had been "blown out of proportion".
Mr Linden said: "In 2016 only 16,500 individuals told HM Revenue & Customs that they had an annual allowance charge to pay due to the tapered annual allowance.
"In reality this allowance is only affecting a small number of people and the furore and publicity that the British Medical Association has created around this issue has been blown out of proportion."
But Mr Linden acknowledged the tapered annual allowance was an "incredibly complicated piece of legislation which was ill-thought out by government".
He said: "Trying to get your head around how it works is very difficult. I have had instances where I have been on the phone for 40 minutes trying to explain to financial advisers just how it works."
The tapered annual allowance has been seen as a problem more recently due to a high number of doctors cutting their hours and choosing to not contribute to the NHS pension scheme to avoid high tax charges.
It emerged in December that the number of members leaving the NHS Pension Scheme was five times higher than that seen by other public pension funds.
The tapered annual allowance gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.
However, Mr Linden said that if parliament caved in to pressure and introduced legislation to change the tapered annual allowance for doctors then all other public sector workers would want the same treatment.
He said this would create an even larger gap between DB and DC pension schemes than there is currently.
Mr Linden said: "Given, what I view, as unfair treatment for those in money purchase arrangements when compared to those in public sector DB schemes, bearing in mind that the latter carries no investment risk to the individual whatsoever, scrapping the tapered annual allowance for anyone in the public sector would be a retrograde step and would further emphasis the ‘them and us’ that is so prevalent in the country at the moment."
The doctors' union wrote to the Prime Minister earlier this week (June 8) to find a solution for the problem surrounding the taxation of doctors’ pensions.
BMA chairman Dr Chaand Nagpaul in his letter urged HM Treasury and the secretary of state for Health and Social Care to meet with the union to drive things forward.
He warned that current government policy on the taxation of pensions was pushing doctors out of the workforce and would eventually cause patients to suffer.
On June 3, Health and Social Care secretary Matt Hancock announced that the government will consult on proposals to offer senior clinicians a new pensions option, which will allow them to build their NHS pension more gradually over their career without facing large tax charges.
Plans to introduce a 50:50 option would allow clinicians to "halve their pension contributions in exchange for halving the rate of pension growth", the Cabinet Office and Department of Health and Social Care stated.
However, the BMA stated that the 50:50 proposal will not remove the incentive for doctors to reduce their working hours.
amy.austin@ft.com
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