Doctors contemplating returning to the workforce are hearing horror stories from colleagues who have been hit by large tax bills they do not understand and had no way of expecting.
Savers with large pension pots change their savings behaviours when they approach the lifetime allowance (LTA) limits – why take a risk and suffer 100 per cent of the loss if things go badly when you will only get 45 per cent of the upside if things go well?
The abolishment of the LTA will greatly simplify the explanation of tax relief to the customers of financial advisers and pension providers. It will also greatly simplify the costly and complex series of reporting between pension providers and HMRC that is required in order to keep track of all of this.
It all depends on how successful the government is in persuading older workers to commit to working for longer.
Time and money at HMRC could be better spent on developing a pensions solution for the self-employed.
In terms of the customer impact, many older workers who had left a workplace pension or ceased contributing to a personal pension/self-invested personal pension will once again be able to contribute. Those who are in employment may be best advised to do so through their employer’s scheme, given the matching contributions.
A slight sting in the tail is the capping of tax-free cash (TFC) at its current monetary amount (£268,000). This means that over time the value of TFC will fall in real terms, and as pension pots grow in size, TFC expressed as a percentage will reduce. Someone whose pot grows to £2.5mn will only be able to access around 10 per cent on a tax-free basis.
This could actually be a real win-win for both pension savers and the exchequer. If people spend longer in full employment, they will pay more income tax during those years than if they had retired.
By delaying retirement, they will accumulate a larger pension pot and benefit from a higher annuity rate, meaning that they will then go on to have a much larger pension income, on which they will pay more tax, potentially at a higher rate.
This could actually be a real win-win for both pension savers and the exchequer.
It all depends on how successful the government is in persuading older, highly skilled and highly paid workers to commit to working for longer.