• Around 300,000 people estimated to be affected by deeply unpopular pension tax taper across public and private sector (https://www.gov.uk/government/publications/pensions-tapered-annual-allowance/pensions-tapered-annual-allowance)
• Someone who delayed contributing to a pension until age 40 could be restricted to saving £250,000 tax-free by age 65
• Even with real investment growth of 5% a year that would amount to a pot of £537,000
• This would buy an inflation-linked annuity worth less than £18,000 a year* – more than a third lower than the median UK salary in 2018 (Source: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/2018)
Tom Selby, senior analyst at AJ Bell, comments: “Doctors and NHS consultants aren’t the only people hit by the Government’s pernicious annual allowance taper – tens of thousands of private sector workers are having their ability to save severely restricted by this complex policy.
“In fact, the vast majority of people hit by the taper will be in the forgotten generation of people in their forties or fifties who missed out on the glory years of defined benefits and for whom automatic enrolment has arrived too late.
“Many will have little to no pension provision at all from their earlier careers, possibly because their wages were lower, their employer didn’t offer a scheme or they prioritised buying a house and raising a family.
“Whatever the reason, the taper acts as a monumental brake for people looking to make up for lost time saving for retirement. It cannot be right that someone who has delayed saving until their 40th birthday risks having their retirement aspirations constrained to a private pension income worth less than two-thirds of the average UK salary.
“Furthermore, because of the way the taper is calculated it is extremely difficult for savers to know in advance whether or not it will affect them in a given tax year.
“There is also a growing acceptance that any form of complexity risks putting people of saving for retirement – even if that complexity doesn’t directly affect them.
“Almost every presentation I give to ordinary investors on the subject of tax relief begins with ‘for most people pensions are relatively simple, but…’. Measures such as the taper are causing untold damage to people’s understanding, confidence and trust in pensions, and make it difficult to explain the benefits of saving in a clear and simple way.
“For all these reasons the Government must now scrap the taper and consider whether the overall pension tax system is really fit for purpose. A move towards greater simplification – with an emphasis on encouraging higher levels of pension saving in the UK – could help cement the retirement revolution automatic enrolment has started.”
*Source: Money Advice Service annuity calculator, rate quoted is an inflation-linked annuity for a healthy 65-year-old on 8th May 2019
How the annual allowance taper works
Whether or not someone is affected by the annual allowance taper depends on two things: ‘adjusted income’ and ‘threshold income’.
Broadly, adjusted income includes all taxable income and employer pension contributions. Threshold income is total taxable income and any salary sacrifice arrangements set up since 9 July 2015 less any personal pension contributions. Any lump sum death benefits where the recipient is liable to tax are also deducted from both income measures.
If someone’s adjusted income is above £150,000 and their threshold income is above £110,000, they will be affected by the taper. Their annual allowance will be reduced by £1 for every £2 of adjusted income above £150,000.
For example, if their adjusted income was £160,000 for a given tax year their annual allowance would drop by £5,000 to £35,000.
How this works in practice – a case study
Georgina had salary of £130,000 and investment income of £10,000 in the 2018/19 tax year. Her employer made a £30,000 contribution and she personally made a contribution of £10,000.
Her adjusted income is £170,000 (£140,000 income chargeable to income tax + £30,000 employer pension contribution).
Georgina’s threshold income is £130,000 (£140,000 income minus £10,000 personal contribution).
As both her threshold and adjusted income are above the Government limits, Georgina is subject to the taper and her annual allowance is reduced by £10,000 to £30,000.
As her total pension contributions were £40,000, she will be subject to a tax charge on the £10,000 excess, unless she has carry forward available.
