Elaine Turtle: ‘Ludicrous’ tapered annual allowance must go

The current tapered annual allowance system is not working and must be reshaped in the upcoming Budget, writes Elaine Turtle

Most people involved in the pensions sector that I have spoken to recently are hoping that there are no huge changes in the upcoming Budget.

No-one really expects wide-ranging change at this point as I am sure the government has other matters to consider with the bongs of Brexit having run and negotiations starting in earnest.

While I would like to see the government leave our pension system alone, at present, it is inevitable that there will be changes. It seems highly likely that we will see a change to the tapered annual allowance.

This is definitely needed as it is having unintended consequences within the NHS. But what is important is that any changes to the tapered annual allowance, are not just implemented for doctors and NHS staff, but for everyone caught by this penal tax.

Nuts and bolts

The tapered annual allowance became effective on 6 April 2016, it applies to anyone with income over £150,000 per annum. It is reduced by £1 for every £2 of income in excess of £150,000 but remains subject to a minimum of £10,000. Those who have income over £210,000 will have a tapered annual allowance of £10,000.

It is widely anticipated that the income threshold for the tapered annual allowance will be raised, but it is so complicated, with so many people being caught out and receiving tax bills, that I believe that the tapered annual allowance should be removed altogether and not just raised.

The last set of statistics that I saw showed that 37,000 people were subject to annual allowance charges in the tax year 2017/18, which doubled from the previous tax year.

Of great concern is the impact it is potentially having on pension saving.

HM Revenue & Customs figures show that annual average pension contributions fell in 2017/18, proving that there is a lot of hesitation around annual contributions due to the complications of the taper.

If we allow this to continue we will see higher rate taxpayers contribute less to the pensions system. If they slow down or stop then lower earners will mirror this and innovation and investment in the pension system will dry up and the government’s desire to get people saving for the long-term will fall at the first hurdle.

It is a ludicrous system that adds more complexity to an industry that we are trying so hard to simplify.

Elaine Turtle is director at DP Pensions