This month's question: Would reducing the annual allowance and scrapping the tapered allowance make sense?
Ricky Chan, chartered financial planner at IFS Wealth and Pensions
What annoys me most about the tapered annual allowance is the uncertainty and potential for hefty, unexpected tax bills if you’re unfortunate enough to be caught by the arbitrary adjusted and threshold income rules.
Planning is difficult for those who may not know their exact earnings for the year, especially if they have, say, annual bonuses, commission or rental income. It is needlessly complicated and does not rise with wages over time, so more people will be affected, especially as the pre-2016 pension carry forwards fall off the three-year radar.
I’m against the government constantly tweaking the pension system as this erodes confidence and does nothing to help with long-term financial planning. But surely the total tax raised from the TAA can be more easily achieved by reducing the annual allowance for all. I think many would accept this for the sake of simplicity.
The TAA has already had unintended consequences on certain cohorts by penalising them more because of their personal circumstances – for example, NHS consultants reducing working hours to avoid large tax bills; senior executive mothers who missed out on years of pension contributions due to raising children and then realising that they cannot catch up on their retirement savings; successful business people who chose to reinvest in their fledgling business during the early years.
How does penalising and alienating these individuals benefit society? Surely it’s time to take the ill-thought-out TAA legislation, roll it into a ball and dunk it in the bin.
John Wollers, paraplanner at Finura
Despite the sterling efforts of auto-enrolment, many are set to have a shortfall in retirement. According to analysis by PwC, someone starting work at age 22 will need to save 15 per cent of their annual salary to achieve their desired income in retirement. The minimum contribution amounts are not enough.
A recent study by Aegon revealed that a pension pot of £301,500 is required at retirement to maintain the lifestyle of the average person. The study found that the average pension pot for a 25 to 34-year-old man who only contributes the minimum auto-enrolment rates will be £142,836 at age 68.
While younger workers may not have the money or desire to save additional amounts into pensions, I have seen that as people approach their 40s and 50s, planning for retirement comes into focus. At this same time opportunities for additional contributions may present themselves: for example, from bonuses, savings or inheritances. A reduction in the annual allowance would hit those who have an opportunity to make up pension shortfalls.
While the government should look at revising or even removing the taper, this is a separate issue. The juggling of allowances to pay for new incentives or as a quick fix is the reason the tax regime is so complicated. There are issues with the taper, but these should be considered in isolation.