Last week (October 13), Interactive Investor's annual retirement report found the freezing of the lifetime allowance and rumours of further changes were causing greater than usual anxiety among both retirees and non-retirees.
Out of 10,000 people surveyed 21 per cent of non-retired respondents, believed they would be hit with charges for breaching the limit, with a further 24 per cent saying they were nearing the £1.073m threshold.
Some have suggested the government could introduce measures to allow couples to pool lifetime allowances, resulting in a joint allowance of £2,146,000.
Becky O’Connor, head of pensions and savings at Interactive Investor, said: “This would mirror the joint treatment of inheritance tax allowances for residential property. We like this idea, and it would acknowledge that for many older couples, a pension for two has been built up in a sole name.”
But the industry is a lot more sceptical as to whether this idea would work or whether it would just make pensions even more complicated to navigate.
Andrew Tully, technical director at Canada Life, said while it seemed like an interesting idea to help couples save for retirement as efficiently as possible, it would add an unnecessary layer of complexity.
Tully said: “Unlike inheritance tax planning, pension saving is an individual exercise that depends on a number of factors including who your employer is and the level of tax you pay.
"Allowing the allowance to be pooled could lead to conflicts where it becomes more advantageous to build one person’s pension over another which could well lead to a higher tax relief bill for the government.
“It could also lead to administrative headaches from a provider perspective, unless both parties happened to have the same pension provider.”
Others have said it would penalise unmarried couples and create a system which could be perceived as unfair.
Steve Webb, partner at LCP, said linking tax breaks to marriage penalised couples who chose to cohabit.
“Although such couples could in theory register a civil partnership and qualify, it seems increasingly anachronistic to restrict a tax advantage to people who are married,” Webb said.
He also raised concerns that the system could get further muddled if people were to remarry.
Webb added: “It is not clear if the option would apply to anyone who was ever married or would only apply to those who were married at the time they accessed their pension. And things would get more messy if someone remarried.
"A system of transferable lifetime allowances would also greatly complicate the collection of LTA tax charges, which are currently collected at source by schemes. What we really need in pensions tax is greater simplification rather than added complexity.”
Tom Selby, head of retirement policy at AJ Bell, said it was unlikely that this sort of tax change would make it through government at this time.
“Given the financial position the country finds itself in, I doubt boosting pension tax relief for relatively wealthy couples will be top of the Treasury’s agenda.”
He also pointed out that both lifetime allowances are able to be used under current rules.
Selby explained: “Where one person has a large salary and one is a low earner, it will be the annual allowance – rather than the lifetime allowance - which acts as the major restriction for the low earner in building up a large pension pot.
“It might be possible in theory to use a joint earnings measure to facilitate a joint annual allowance for a couple – thereby allowing larger combined lifetime contributions - although this would inevitably lead to significant complexity.
“Rather than tinkering with allowances and potentially making life more complicated, we would prefer the government to focus on simplifying the pension tax system.”
amy.austin@ft.com
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