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How the annual allowance is driving doctors out of the profession

How the annual allowance is driving doctors out of the profession
(EVG Kowalievska/Pexels)

Pensions are a generous form of saving for the future in that the government will always give savers 20 per cent in basic rate tax relief when they add money to their pension.

This jumps to 40 to 45 per cent for higher and additional rate taxpayers, so saving into a pension is sort of a no-brainer.

But as the well-known saying goes, nothing in life is for free, which is why there are annual allowances in place to limit the amount of money a saver can build up tax-free in their pot in any one tax year.

While there is no dispute that allowances are needed, there is an argument that the government has gone too far with these and the rules surrounding them have become so complicated that now people would rather avoid contributing to their pension full stop than have to attempt to navigate them.

Currently, the annual allowance is £40,000 for most people but higher earners also have to consider the tapered annual allowance, which further limits the amount of tax relief they can claim on their pension savings by slashing their annual allowance to as low as £4,000 in some cases.

And when people think that is the end, then comes along the money purchase annual allowance. This sees a person's allowance limited to £4,000 once they have started to draw their pension.

Tom Selby, head of retirement policy at AJ Bell, says it makes perfect sense to control the amount that is spent on pension tax relief as failing to do this would effectively leave the Treasury with an open-ended liability. But he questioned whether the current system is the right way to do this.

“The question then is not whether pension allowances should exist, but how they are applied and if the current system is really the most sensible way of controlling tax relief,” Selby says.

“If you were starting from scratch, would you really create a framework with three different versions of the annual allowance, a lifetime allowance and a plethora of protection regimes to boot? I’m not sure anyone could say with a straight face that’s a sensible construction – and it most certainly isn’t simple.”

Complex rules catch savers out

Those brave enough to try and navigate these rules often face punitive tax charges by exceeding their allowance and could even miscalculate what they owe, according to industry experts.

Divisional director of retirement and holistic planning at SJP Claire Trott has come across clients where they had not realised they had issues. “That's why a lot of their tax charges seemed to be so high because they were paying three or four years of allowance breaches in one go,” she explains.

Trott went on to say that if schemes provided data on allowance breaches, and HM Revenue & Customs collated it, it would make more sense than it being a sort of “honesty tax” where people have to understand the rules.

“People have probably over-declared [the tax owed on breaches],” she added. “The amount of people I have spoken to who have said ‘I’ve gone over my annual allowance, I need to put it on my tax return’ but this is not the case because they have got plenty to carry forward”.