The government should consider applying different pension allowances to taxpayers depending on whether they are saving into a defined contribution scheme or a final salary plan, the Office for Tax Simplification has said.
In a 93 page report published yesterday (October 10) the OTS highlighted the issues many defined benefit members, such as doctors and consultants, have been facing with the annual allowance and the tapered AA.
It stated: “As the legislation produces distortions in behaviour that have negative effects such as those in the NHS, it seems sensible this legislation should be reviewed with a clear focus on its wider impact.”
Introduced in 2016, the tapered AA 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.
The taper means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.
The OTS also noted that for DC members it was difficult to forecast growth for lifetime allowance purposes, since these type of pensions not only grow through savings but also by the growth of the value of the investments in the fund.
“Given the policy aim of limiting the overall amount of pensions savings tax relief available to any one individual, applying both the AA and LTA charges to pensions may be unnecessary,” the document stated.
One possibility would be for the AA to apply in relation to DC schemes and the LTA in relation to DB schemes, which would reflect “the most natural operational and administrative fit between the two approaches and the type of scheme involved”, it stated.
The organisation also urged the government to review the money purchase annual allowance to consider if it is set at the right level given the “present potential for disproportionate outcomes”.
It suggested a review of the tax, “gathering better evidence, considering whether it meets its policy objectives, is set at the right level and is sufficiently understood, given the present potential for disproportionate outcomes”.
The MPAA, introduced in 2015 to coincide with pension freedoms, is the amount a person who has already begun drawing on their pension can pay back into their retirement pot in a given year without incurring a tax charge.
The allowance was cut from £10,000 to £4,000 in April 2017, following an announcement in November 2016.
At the time of the announced cut, the government said it wanted to ensure savers were not recycling cash through their pension.
According to analysis from Aegon, individuals earning £30,000 who, alongside their employer, are contributing sums equivalent to 14 per cent of their salary to a money purchase pension, would be caught by the MPAA if they enter drawdown.
Sir Steve Webb, former pensions minister and director of policy at Royal London, said the OTS report “makes a great deal of sense”.
He said: “It has highlighted several areas where the tax system causes complexity and unfairness for ordinary taxpayers. Ideally, the government would listen carefully to this report and make changes.