The last few years have seen a torrent of changes to pensions including greater freedom in how savers can use their pensions and the ability to pass them on to the next generation without incurring hefty death duties.
Yet under George Osborne’s tenure as Chancellor of the Exchequer, there have also been some rather less welcome changes to pensions, with repeated reductions to both the amounts that can be invested in them each year and the lifetime allowance.
Anyone exceeding the lifetime allowance must pay a 55 per cent tax bill on the excess when benefits are taken.
The last Osborne-instigated raids on pension tax allowances were introduced this tax year. The first of these was yet another reduction in the lifetime allowance from £1.25 million to £1m, down from £1.8m when Mr Osborne first took up the post of Chancellor.
And the second assault on pensions this tax year was in the form of a complex and confusing new ‘tapered’ annual allowance that sees those with total adjusted earnings of £150,000 upwards have their annual allowance reduced by as much as 75 per cent, irrespective of the amount they have in their pensions, even if they have no pension savings at all.
While most of us will regard an accumulated pension pot of £1m or earnings of more than £150,000 as enormous and wonder if those affected really deserve our sympathy, the reality is that as a result of the policies of ultra-low interest rates and bonds yields adopted by the Bank of England, even a £1m pension pot won’t secure a lavish retirement income stream.
The biggest impact of these raids on pensions is arguably going to be on public sector professionals, many of whom continue to have access to defined benefit or final salary pension schemes but who may not be fully aware that the equivalent value of these schemes makes them pension millionaires.
Indeed, those with a projected defined benefit pension entitlement of £43,500 upwards in the NHS or Teachers Pension schemes face the prospect of breaching the lifetime allowance and taking a hit.
As awareness of the impact is spreading, financial advisers are seeing increasing numbers of experienced medical professionals and senior teachers conclude they should take early retirement.
At a time when the public services are seeing staffing shortages and there is increased competition from well-paid posts abroad, which will only intensify with the weakness of sterling, this is adding to unhappiness in the public sector.
But the effects of constant meddling with the pension tax reliefs go beyond those directly impacted by such changes, as such fiddling saps public faith in pensions and creates a perception the system is in flux.
Yet the irony of all this tinkering is that a recent report by the Office of Budget Responsibility concluded that the various changes to the tax treatment of private pensions and savings of recent years, while creating a “small net gain to the public finances” in the medium term, will actually turn negative for tax receipts from 2021-22.
You therefore have to question whether much of the disruption to the system during Mr Osborne’s spell at the Treasury, which many suspect was aimed at helping him meet his self-imposed timeline for eliminating the UK deficit, has been worth it.
With Mr Osborne now consigned to the backbenches, there is a real opportunity for the Government to end the constant attrition of pension tax reliefs.
Now is the time to break with the past and scrap the lifetime allowance and ditch the complex and confusing tapered allowance.
Instead there is an opportunity to consider implementing a simpler and fairer annual allowance equally available for all that will adjust annually for inflation and with a flat rate of relief that is attractive to savers across the income tax bands.
Above all it is time for an approach that should be built to last.
Jason Hollands is managing director of Tilney Bestinvest
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