Our pensions need urgent reform – to reward thrift, not punish it

As doctors stop working extra shifts to avoid falling into obscure tax trap

SAVING for when work is no more and slippers – rather than shoes – are the order of the day is a basic tenet of personal finance planning. It’s about forfeiting a little today so that the tomorrows can be underpinned by a modicum of financial security.

For nearly 100 years, the mainstay of most workers’ long-term savings plans has been the occupational pension, made attractive by the tax relief savers get on their contributions – courtesy of the Government. Tax relief that currently amounts to a jaw dropping £39 billion a year.

Despite all the twists and turns, scandals (Maxwell, lack of protection for workers in pension schemes hit by corporate failure), changes of government, and new competing tax-friendly saving plans such as Peps and Tessas (both now defunct) and Isas (very much alive), pensions have remained top dog. Just about at times.

They are the vehicle most people depend upon to see them through retirement – with the assistance of the rental income provided by the odd buy-to-let property, the equity tied up in their main home (eminently releasable) and of course the State pension with its reassuring triple lock guarantee (for now anyway).

Recent rules requiring employers to auto-enrol most workers into a pension mean more people are saving for their future than ever before – 10 million more than before so called auto-enrolment was introduced seven years ago. Brilliant, although more than nine million workers still fall through the pension cracks because of their age (too young), their earnings (insufficient) or their refusal to join in the auto-enrolment revolution by opting out of it.

So, on the whole, all relatively rosy in the pensions garden? Far from it.

The Mail on Sunday believes it is high time the Government took its pruning shears to a plethora of unfair pension rules and made pensions truly fit for purpose – an exercise that the previous Chancellor of the Exchequer Philip Hammond (‘ Eeyore’) refused to entertain during his miserable tenureship.

As for the Chancellor before him, George Osborne, he is one of the main reasons why urgent pruning is now required because he introduced some of the nasty changes that have resulted in some senior NHS staff receiving unexpected tax bills for unknowingly breaching specific pension rules.

Some NHS workers have stopped working extra shifts to ensure they don’t fall foul of the pension tax trap while Mark Cheetham, a colorectal surgeon at the Shrewsbury

and Telford NHS Hospital Trust, has launched a petition calling for the offending rule, the so-called tapered annual allowance, to be scrapped. So far, around 18,000 people have signed it. If the petition attracts more 100,000 signatures, it is likely to be discussed in Parliament – although Brexit fallout and political grandstanding may put a spanner in the works.

It is why today we are launching a campaign urging the Government – and in particular Chancellor Sajid Javid – to get rid of some of the rules that deter people from saving and end up penalising those who enjoy investment success with their pensions.

Mr Javid, less complexity and more si mplicity please. Also, greater fairness for everyone embracing the pension culture.

Simultaneously, we believe pensions should be made more inclusive by bringing forward reform of the auto-enrolment rules that were announced 20 months ago, but for which no date was given for their introduction other than the ‘mid 2020s’ (classic wishy-washy Government promises).

These are pension changes we have long argued for. They are changes that make sense and are fair – and they are changes that will properly reward prudence.

They are also recommendations for change that a swathe of financial experts – including two former pension Ministers – believe are vital if thrift and financial independence are to be encouraged rather than discouraged.

SCRAP THE TAPERED ANNUAL ALLOWANCE

CURRENTLY, we are all encouraged to save into a pension through the bonus of tax relief on our contributions. In simple terms, the more tax we pay on our income, the more tax relief we enjoy on our pension contributions.

So, put £100 into a works pension or personal pension (usually used by the self-employed) as a basic rate taxpayer and it will only cost £80 – £79 if you live in Scotland because basic rate tax is set at 21 per cent, not 20 per cent. If you are a higher rate taxpayer, the same £100 only costs £60, or £59 in Scotland.

For both basic rate and higher rate t axpayers, t he maximum amount per tax year that can be put into a pension – and be eligible for tax relief – is £40,000. This includes any employer contribution and is known as the annual allowance. So far, all fine and dandy. But for additional rate taxpayers, the rules are far more complicated because of the tapered annual allowance that Osborne introduced in April 2016. Although any pension contributions are potentially eligible for 45 per cent tax relief (46 per cent in Scotland), the annual allowance starts getting crunched once someone’s annual i ncome exceeds £110,000 – reducing or tapering in st ages f rom £ 40,000 down to £10,000.

Calculating the tapered allowance as an additional rate taxpayer is fiendishly complicated, especially if you are a member of a defined benefit pension scheme such as that run by the NHS.

It involves calculating different

definitions of annual income – socalled ‘ t hreshold’ i ncome and ‘adjusted’ income – and for most it is impossible without drawing upon the expertise of a professional financial adviser. Even then, it may be too late to avoid a nasty tax bill for inadvertently exceeding the allowance.

WHAT IS REQUIRED: The tapered annual allowance should be scrapped for everyone. Plain and simple. Experts are united on this other than Treasury officials (Javid has so far merely promised to look at it).

Steve Webb, Pensions Minister in the Coalition Government headed by David Cameron, s ays t he tapered annual allowance is ‘irredeemable and should go’.

He says it makes pension planning ‘ nigh impossible’ for many high earners, especially those with unpredictable earnings, because the permitted allowance cannot be calculated until someone knows how much income they have earnt in the relevant tax year.

So, Webb says, it is easy for someone to overcontribute, resulting in a tax bill for the tax relief they were not entitled to.

Baroness Altmann, a Pensions Minister in the Conservative Government formed after the 2015 General Election, says the tapered allowance adds ‘layers of penalties and complexities’ that ‘disincentivise’ pension saving – and in some instances force people to stop working extra hours for fear of falling foul of a pension tax trap.

Ian Browne, pensions expert at wealth manager Quilter, describes the allowance as a ‘sticking plaster of an idea that adds complexity to pensions when people need simplicity’. He adds: ‘We should be encouraging people to set aside money for the future, not putting them off with rules you need to be a brain surgeon to understand.’

Most experts say the tapered allowance should be axed, even if this means everyone having a lower maximum annual pension allowance in the future – say £35,000 a year rather t han t he current £40,000. Says Browne: ‘The key is that the maximum annual pension allowance applies to all savers.’

ABOLISH THE LIFETIME ALLOWANCE

YOU would have thought that, given the Government restricts how much we can put into our pension every year, it would then leave us alone to enjoy the fruits of our prudence in retirement – allowing us to take a slice of our pension fund as tax-free cash and the rest as taxable income. But of course it doesn’t quite work out that way.

So, if you have invested your pension wisely or you have accumulated it over many years, maybe enjoying job promotions and sizeable salary uplifts along the way, there is a good chance the Government will come after you for a ‘success’ fee. This means any pension fund value above £1,055,000 attracts a tax charge of up to 55 per cent.

Given this so called lifetime

allowance stood at a higher £1.5 million six years ago, it is no surprise that an increasing number of people are being caught out. Research earlier this year by Royal London indicated that 290,000 people yet to retire had already amassed pension funds above the lifetime allowance – and are therefore facing a future tax charge.

WHAT IS REQUIRED: Like the tapered allowance, the lifetime limit on pension saving should be scrapped. Both Altmann and Webb believe it should be axed as does Quentin Holland, partner at wealth manager The Private Office. He says: ‘Penalising those who dutifully save hard and take investment risk is plain stupid.’

Browne agrees, describing the allowance as ‘a penalty on success that discourages saving’. He adds: ‘A pension fund of just over £1 million may seem a lot but it must need to last 30 or even 40 years depending on when an individual retires and how long they live for.’

He says a £ 1 million fund currently buys an inflation linked annual income in the region of £30,000 – a pretty modest threshold, he argues, to be saying to people that if they saved any more they would be effectively fined.

HELP MORE SAVE BY AUTO-ENROLMENT

OF COURSE, it’s not just high earners who should be the beneficiaries of any pension reform. It is also vital that the self-employed, the young and those on relatively low incomes, are encouraged to save more into a pension.

This encouragement could be provided through the auto-enrolment regime, which requires employers to provide pensions for most workers – although employees can opt out.

In late 2017, the Government said it would be making changes, including auto-enrolment of employees aged between 18 and 21 (currently excluded) and basing pension contributions on a bigger slice of earnings. But it would only commit to i ntroducing them i n the ‘ mid2020s’.

WHAT IS REQUIRED: With a new Chancellor installed and open to new ideas, now is surely a good time for a more precise timetable to be agreed on the introduction of t hese changes. Surely, sooner rather than later – and certainly not as late as the mid-2020s.

Javid should also confirm what the next rise in minimum pension contribution levels will be – and when it will be introduced. As I have said before, the current eight per cent minimum will guarantee no one financial bliss in retirement. It needs to rise in stages to 15 per cent.

The new Chancellor should also tell us whether he intends to do anything for the five million selfemployed workers who sit outside the auto-enrolment regime.

Browne says: ‘The Government had previously promised to address the gap in retirement provision that the self-employed face. But so far there has been no concrete action. Now is as good a time as any to deliver on this promise.’ I agree.