Even with all the noise of a general election, the tapered annual allowance continues to make the headlines, presenting advisers with a significant opportunity to make the case for pension planning.
As Parliament was shutting, the famous London hospital trust Guy’s and St Thomas’s said a lack of consultants had meant one of its intensive care units was closed for 18 weeks during the summer. Consultants were cutting back their hours to avoid increased tax bills resulting from their pension arrangements.
Of course, the NHS pension is defined benefit. Yet we think it will put all higher earners whether they have DB or DC arrangements - on notice. In other words, the public are becoming much more aware of the tax consequences of the taper.
This should allow advisers to win new clients and to get the message across to anyone earning £110,000 a year and above about the importance of pensions planning and the benefits of optimising their pension savings.
Government figures bear this out. The taper and annual allowance restrictions are having an increasing financial impact each year.
Figures released by HMRC in September this year revealed that the total value of contributions reported as exceeding the annual allowance was £812 million in 2017-18, compared with £578 million in 2016-17 and £143 million in 2015-16. The direction of travel is clear.
Advisers tell us they are fielding more inquiries and being asked for advice by highly paid clients and potential clients.
They also need to pay heed to the fact that the regulatory picture could change very rapidly indeed.
The taper itself was the culmination of almost a decade of policy changes – since pensions simplification - driven by Treasury worries about the generosity of tax reliefs on offer to high earners.
It came into force on 6th April 2016, potentially affecting those earning more than £110,000 a year and upwards.
Thus, if someone’s threshold income exceeds £110,000 and their adjusted income for the tax year exceeds £150,000, they lose £1 of annual allowance for every £2 of adjusted income in excess of £150,000.
Tapering is at least limited to £30,000 - the worst-case scenario would see the annual allowance reduce from £40,000 to £10,000.
Of course, the taper was only one element of what had been a gradual turning of the screw on the annual and lifetime limits.
For example, if we go back to 2010/11, the annual allowance was £255,000 dwarfing today’s £40,000.
But now that the consequences of the taper are increasingly apparent, it has met a chorus of disapproval.
Most of these voices are public sector including the armed forces, but it is the NHS - both employers and doctors’ representatives such as the British Medical Association (BMA) that are making the most noise. The BMA has armed itself with real life examples of eye-watering marginal tax rates to support its demand that the taper be scrapped.
Advisers should note that the Department for Health had already extended the scheme pays system. It also plans to allow senior NHS staff to limit their pension accruals in slices of 10 per cent in any one year and once they know the tax situation can then make up the difference. But the doctors remain adamant they want the whole system scrapped.
Clearly this would have huge implications across both DB and DC pensions. It also has some political and widespread business support. Ros Altmann, a former Conservative pensions minister and pension campaigner, wants to see the taper scrapped.
An Association of Consulting Actuaries (ACA) survey of more than 300 employers found 69 per cent want the taper scrapped with many saying lower tax relief would be a price worth paying.
Perhaps most intriguingly, the Office of Tax Simplification (OTS), the government’s in-house tax advisers, has suggested a review of both the annual allowance (AA) and the lifetime allowance (LTA).
Its Life Events Review: Simplifying tax for individuals included examples of how the annual allowance was not working for individuals. Although not a full recommendation, it even mentioned the possibility of applying the annual allowance to defined contribution schemes (with no LTA) and the lifetime allowance to defined benefit schemes (with no AA).
All of this adds up to a huge amount of pressure for reform. That said, the upcoming election also means that a Budget planned for the 6th November has been postponed. A fundamental redesign of the pensions taxation system in time for the next tax year seems unlikely by next April. After that however, we think more significant change could be on the agenda.
So, here are our initial thoughts on what should be done.
We think the next Government should address the taper issue very swiftly – scheme pays and the accrual changes feel like stopgaps – and NHS services may continue to be affected without more significant changes in time for the next tax year.
Second, while it is perhaps too late for this tax year, a big holistic reform is required.
Pensions simplification is more than ten years old, and it has been substantially altered by a series of changes over the years often for competing reasons and certainly not all to do with pensions.
We need a coherent approach and advisers should be invited to play their part though, as we say, that may have to be after April next year.
But we would emphasise again that this pension turmoil presents an opportunity for advisers to show their worth.
They can help their DC clients with seriously value-added tax planning. They can also provide a very important service to high paid public sector workers in explaining the changes, considering the various help and short-term solutions on offer from their scheme and the Government itself, and at the very least setting out the options.
For both DB and DC clients, this should mean working closely with clients’ accountants and helping them sense check the information they have to hand.
Clearly, this is a big headline grabbing issue because senior public sector workers are facing unexpected and hefty tax bills. Advisers may also want to remind all their current and prospective clients, albeit gently, that it is a matter of retirement planning too.
Matthew Rankine, Corporate Sales Director at Embark Group
Matthew has been an executive director in the SIPP industry for several years with his specialties in sales, product development and managing client relationships. He has experience of bringing new products to market and distributing these through financial advisers and other financial connections. At a previous role, he helped grow the business to administer over £3 billion of pension assets. He holds a degree in Maths.
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