Speaking at the Pensions and Lifetime Savings Association’s annual conference in Manchester yesterday (October 17), Rachel Brothwood, director of pensions at the West Midlands Pension Fund, said it was challenging for schemes to find suitable advisers for their members, “who have got knowledge of public sector schemes, or sufficient knowledge of pension tax”.
She explained more and more of the 300,000 members of West Midlands Pension Fund were opting out of the scheme due to being hit with tax bills.
She said: “These individuals aren't used to navigating self-assessment, they don't have an IFA ready who can advise them on this sort of thing, they are particularly averse to paying for financial advice and don't necessarily trust the tax system.
“It is a real problem because we can't deal with them through generic examples and generic information. Quite often the response is that it is easier to avoid, it is easier to opt out.
“In those circumstances they are missing out on benefits and in the public sector schemes in particular they are missing out on lump sum death cover that they would otherwise have.”
Steve Carlson, chartered financial planner at Cardiff-based Carlson Wealth Management, said he does not agree that there is shortage of IFAs in this area.
He said: "The problem is that you need to calculate short-term tax liabilities and balance those against the long-term value of the pension, which makes the advice quite complex and appropriate fees have to be charged.
"Many people are unwilling to pay for this advice (even when the benefits could be huge), so the problem is more about the willingness to pay for the advice rather than its availability."
Ms Brothwood said the pension fund – part of the Local Government Pension Scheme – had seen a six-fold increase in tax paid through scheme pays since the tapered annual allowance was introduced in 2016.
Minor changes such as a promotion or acting up on a role can trigger a tax charge for the scheme members, she explained.
Ms Brothwood said: “In 2017/18 we produced 406 pension saving statements, over 70 per cent of those were in respect of people earning less than £80,000 a year.
“I would ask the question are we actually targeting the right people.”
Year | Tax paid by scheme |
2015 | £123,559 |
2016 | £94,956 |
2017 | £450,970 |
2018 | £591,947 |
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.
The taper means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.
Ms Brothwood doesn’t believe, however, that financial advice is the solution for the problem.
She said: “We are potentially creating a cottage industry if we go down that route for a problem that we should really try to solve in a different way.
“Why are we trying to get people that really shouldn't be caught by these taxes to go through the whole process of financial advice? Let's make it a better system.”
HM Treasury said in August it will be reviewing the impact of the tapered annual allowance after it became a similar problem for doctors, many of whom opted to cut their hours to avoid high tax charges, creating a problem for the NHS.
maria.espadinha@ft.com
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