The recent scrapping of the lifetime allowance and the increasing of the threshold for annual allowance to £60,000 from £40,000 announced in the spring Budget lead me to ask the question: what behaviours are we trying to encourage with any tax changes?
Three clear behaviours spring to mind:
Keep paying into your pension
In the case of the NHS's most senior clinicians, it is very clear that we need more of them to carry on working for longer to help chip away at those waiting lists.
An article entitled "The long goodbye? Exploring rates of staff leaving the NHS and social care", published by the Nuffield Trust in February 2022, found that for hospital consultants in particular, pensions taxation was a key issue.
Half of those who had made definite plans to leave the NHS reported pensions tax to be a major factor in their decision to leave.
Furthermore, the British Medical Association found that, in repeated surveys it has run over recent years, pensions taxation was one of the major factors causing doctors to either retire early or reduce their hours.
It has been calling for the pensions taxation system to be urgently reformed following Rishi Sunak’s decision, back in March 2021, to freeze the LTA until 2025-26.
If the pensions tax regime needs to encourage more of us to keep on working, as Jeremy Hunt stated, then the freezing of the LTA worked directly against that.
The pensions tax system should be encouraging people (or at least not discouraging them) to come out of retirement and go back to work to help out.First, it encouraged more pension savers each year to retire at the point where they were coming close to the £1.07m upper limit.
Second, it encouraged all defined contribution pension savers approaching retirement age to move their savings into cash or low-return assets to avoid unwelcome heavy tax bills linked to exceeding the LTA, while annual allowance thresholds could be avoided by simply diverting additional savings for retirement, into Isas for example.
However, for NHS workers these sorts of adjustments were not an option because, in defined benefit schemes like the NHS pensions scheme, it is impossible for employees to control in-year pension growth. NHS workers’ pension growth is directly linked to the value of pensionable pay.
Increasing pensionable pay, either through extending hours worked or having a pay rise, can lead to AA or LTA penalties.
While the NHS staff were the most visible manifestation of this conundrum, I am sure there were many others similarly discouraged from becoming more productive.
Invest pensions money for the future
Once we have fresh eyes on pensions tax changes, what else can we change for the better? Pensions offer an opportunity for a massive transfer of wealth between the generations. So, it is eminently sensible long-term thinking to invest pensions money into the businesses of the future.
Too many pension funds, both DB and DC, are invested overcautiously. This is leading to calls for investment control to be taken away from trustees, perhaps for certain investments to be mandated or for the creation of state-sponsored superfunds.
But before we decide that politicians should determine whether our pension funds should be used to finance the next Garden Bridge or whatever, perhaps the tax system could gently encourage our trustees, advisers or discretionary fund mangers to make the right sort of investments.
New innovative companies – the bright young things of tomorrow – need equity finance to take them through the various growth stages of a business.
Then, in the years to come, they will be able to deliver the wealth that will pay good pensions.
The freezing of the LTA back in March 2021 worked directly against that virtuous cycle.
It encouraged all DC pension savers to move their savings into cash or low-return assets in the last few years of work to avoid unwelcome tax bills linked to exceeding the LTA.
Yet clients approaching retirement still have 20 to 30 years of life ahead of them, so they should be able to take a long-term view to investment. They should not be encouraged to move more money into low-growth, "safe" assets.
And yes, this might include investment in so-called illiquid investments like long-term asset funds (just green lit by the Financial Conduct Authority as a permissible asset for DC pensions) and long-term investment for technology and science (Lift) initiative (a government plan to encourage DC pension schemes to invest in small, innovative, research-intensive UK companies).
The chancellor is set to award up to £250m of tax incentives to those developing the Lifts initiative in his November Budget.
Encourage former workers to ‘un-retire’
This is not just for NHS workers, for whom the call was put out early in the pandemic: all sorts of experienced and often senior former employees may find themselves receiving a call asking them to come back to work to lead some project or other.
They need to be encouraged to take these roles up, as the UK, especially since Brexit, has been short of people in all manner of skilled areas.
Independent financial advisers who have sold annuities may already have had awkward conversations with clients un-retiring.
There is simply no facility right now to say, “Hold the annuity payments for a bit, I’ve got a salary again.” It’s an HM Revenue & Customs rule that annuities cannot be surrendered.
So those who do un-retire can find themselves in receipt of both pension payments and salary payments at the same time, thereby being propelled into an uncomfortably high tax bracket.
In DB schemes, such as the NHS, it is fiendishly complicated to return to the job and try and rejoin the pension scheme.
In the DC world, the money purchase annual allowance disincentivises experienced people coming out of a period of retirement (in which they have been drawing on their pension) from topping up their pension if they go back to work.
Perhaps their employer will pay them extra salary in lieu of a pension contribution, but that is very inefficient from a national insurance point of view.
The pensions tax system should be encouraging people (or at least not discouraging them) to come out of retirement and go back to work to help out.
Perhaps now the LTA has gone, we can dismantle the framework of benefit crystallisation events, which sees retirement as only a one-way transition from accumulation to decumulation.
That is just too simplistic for today’s labour market, and frankly UK plc can no longer afford to have this pool of talent lying idle.
In conclusion, is it not time that we had a long look at the pensions tax regime?
I am sure IFAs have dealt with plenty of different retirement-linked conundrums in recent years. They could put this knowledge to work to contribute to an overdue pensions tax review that reveals where the old rules frustrate rather than encourage the behaviours that our post-pandemic, post-Brexit nation now needs.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
