Baroness Altmann wants both the lifetime and tapered annual allowances scrapped due to them causing “enormous problems” for some pension scheme members, especially those in the public sector, such as the NHS.
Introduced in 2016, 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.
This has resulted in many senior doctors opting out of the NHS Pension Scheme, reducing their working hours or retiring early to avoid high tax charges.
Baroness Altmann said these unintended consequences must be addressed quickly.
She said: “It is a false economy. While the NHS wants to increase productivity, the pension system is perversely driving many experienced staff to do less work.
“There are examples of consultants who receive a promotion that they are told give them a pay rise, only to find they end up paying tens of thousands of pounds to the government instead.
“The pension scheme is meant to be a cornerstone of the staff reward package, but is turning into a mechanism that actually leads to sharp pay cuts, without warning, sometimes as a result of promotion or volunteering for extra work. The system must be reformed.”
To address this problem, the taper could apply to the past year’s earnings instead of the current year, Baroness Altmann suggested.
This would help people plan for the current year’s reduced allowance, as they should know what last year’s earnings were.
She also said that changing the complicated earnings calculations and the way defined benefit accruals are assessed for annual allowance tax purposes could help address this issue.
Baroness Altmann said: “In a defined contribution scheme, contributions are clear, but not for defined benefit schemes in which accrual is an actuarial calculation.
“In the NHS, the calculations are different for each pension scheme and the factor used to work out accruals could be adjusted to address the high pension accruals. Using the actual amounts contributed would be much easier to predict.”
Staff also need to be provided with individual financial advice to help them navigate the tapered annual allowance effectively, she said.
She also wants the lifetime allowance, currently set at £1,055,000, to be scrapped and instead the government should limit annual contributions.
Baroness Altmann explained the methodology for calculating whether someone has exceeded their LTA made the tax allowance greater by retiring earlier.
She said: “Pension tax rules which drive some of our most valuable NHS staff to stop working and give up on pensions are clearly counter-productive. These rules are seriously impacting availability of GPs across the country.
“The government should abolish the LTA and rely only on limiting annual contributions. If the amount of annual contributions is restricted, it seems illogical, in the context of long-term investment planning, to also impose a limit on the success of their investment policy.
“Pension withdrawals are taxable, so tax can be recovered later, but penalising those whose funds grow ‘too much’ runs counter to the aims of pension investing.”
Finally Baroness Altmann called for an urgent fix for the net pay tax relief issue.
There is a problem in the auto-enrolment pension system which results in lower-paid women being penalised and effectively forced to pay 25 per cent extra for the same pension as someone earning more than them.
This is the result of the way their employer’s chosen pension scheme administers the tax relief.
In a ‘net pay’ scheme, those earning less than £12,500 a year, will pay 25 per cent more for their pension than if their employer had chosen to put them into a ‘relief at source’ pension scheme.
Baroness Altmann said the government, the Pensions Regulator, pension providers and the industry know about this problem, but have yet to address it.
She said: “It is one of the biggest pension injustices, with low-paid workers innocently paying more than they need to for their pensions. There is currently no way of them receiving this money, it is a function of the way their pension scheme and the tax system operates.
“These low earners were promised basic rate tax relief, yet they are not receiving it.
“I urge all the political parties to commit to reforming this system, so that low earners enrolled into a workplace pension do all receive tax relief, regardless of what type of scheme they are in.
“Alternatively, the regulator should ensure that these low paid staff are either put into a relief at source scheme (such as Nest), or reimbursed by the scheme or their employer.”
amy.austin@ft.com
What do you think about the issues raised by this story? Email us on fa.letters@ft.com to let us know
