Pensions can be complex and difficult to understand.
But then they are not alone. The tax rules suffer from the same complaint.
So, put them together and what have you got? In many instances, I regret to say, a very toxic mix and a recipe for muddle and confusion.
Take the tapered annual allowance for high earners. Apart from a few accountants and other self-appointed ‘experts’, I am not sure there are many people who fully understand how the taper works, which income has to be taken into account (no, it’s not just earnings!) and the rest of the over complicated rules that have to be applied.
Also high up in the complexity stakes is the lifetime allowance, designed initially to limit the overall amount of tax relief claimed by the country’s highest earners but now starting to impact on the middle classes, doctors, senior nurses and others in professional services more widely.
There is an unjustified (and largely incomprehensible) difference in the treatment of defined contribution (DC) and defined benefit saving limits and you need at least a first class honours degree to get your head around the rules on the different types of individual protection available.
And what about the new money purchase annual allowance?
According to the latest figures from HM Revenue and Customs, a record £2.3bn was withdrawn from pensions under Freedom and Choice in the second quarter of this year. This represents the largest number of withdrawals in a quarter since the freedoms were introduced in 2015.
You have to wonder how many of the thousands of over-55s who are dipping into their pension pots while continuing to benefit from workplace pension contributions are at risk of a shock tax charge.
Many will be totally oblivious to the fact that by even withdrawing a very small amount from their pension pot – say perhaps for a holiday- they could inadvertently be triggering the money purchase annual allowance.
This means that they are effectively restricting the total amount that can be paid into their DC pension plan without a tax penalty for every year from then on to £4,000, a big drop from the £40,000 that would otherwise be allowed – with all that means for their future retirement plans and level of pension income in retirement.
There is no doubt in my mind that we need a simpler system of tax reliefs and allowances, one which the ordinary person can understand and appreciate for what it is, namely a means of encouraging and incentivising pension saving and not one seemingly designed to ensnare the unwary and bolster the coffers of the treasury.
And yet if we are to believe the various rumours and speculation that abound, the chancellor may be contemplating introducing in his Autumn Budget a move to a single flat-rate of pension tax relief, which whatever its merits ethically could complicate the system and the payroll processes associated with it even further.
I would hope, therefore, that whatever he decides to do to save money this time around (presumably his ultimate aim) the chancellor will be disposed to review more fundamentally the whole area of pension tax reliefs and allowances and ask himself whether many of the arcane rules are really necessary or alternatively could be made a good deal more consumer friendly.
A good area to start off with would be the three allowances I have referred to above – the tapered annual allowance, the lifetime allowance and the money purchase annual allowance.
Do we need them? Could the treasury get by without them? What damage are they inflicting on people’s retirement plans? Is there not a better way? Mr Hammond, over to you.
Malcolm McLean is senior consultant at Barnett Waddingham