• The Office of Tax Simplification (OTS) has today urged the Treasury to review a series of complex pension tax measures (https://www.gov.uk/government/publications/ots-life-events-review-simplifying-tax-for-individuals)
• The impact of the money purchase annual allowance (MPAA), annual allowance and lifetime allowance all under the microscope
• OTS also urges Government to address net pay anomaly and allow parents to claim back National Insurance credits
• Report strengthens the case for a fundamental review of retirement savings incentives
Tom Selby, senior analyst at AJ Bell, comments:
“This latest report lays bare the nightmarish complexity facing savers attempting to navigate the UK pension tax system.
“It is frankly bizarre that savers now have to get their heads round an annual allowance, money purchase annual allowance, tapered annual allowance and lifetime allowance, all of which could apply to people at different stages of their life.
“Some of these measures have serious consequences. The taper, for example, is placing huge strain on the NHS as senior doctors are forced to refuse extra shifts to avoid eye-watering tax bills. The MPAA, which is poorly understood, severely punishes those using the pension freedoms, reducing their annual allowance from £40,000 to just £4,000.
“We know this complexity puts people off pensions and the Government now needs to put simplification at the heart of its savings agenda.
“Rather than looking at these issues in isolation, policymakers should convene a commission tasked with simplifying the system and encouraging more people to save for retirement.
“Low paid savers are also subject to an unfair pensions lottery which can mean they miss out on tax relief if they are automatically enrolled into a ‘net pay’ scheme. This is simply not right and the Government must urgently address this issue, which cruelly hurts the savings aspirations of the lowest paid workers.”
Child benefit
“Once a parent earns more than £50,000 they start to lose their child benefit, until it’s wiped out at the point when they earn £60,000 or more.
“This means those earning above this threshold often think they don’t need to bother claiming child benefit at all, but by not doing so they are missing out on crucial National Insurance contributions.
“As it’s often the mother who is off work with the child, it means they miss out on entitlement to the state pension, further exacerbating the gender pension gap.
“It’s good the OTS have identified that it’s ‘unreasonable’ the system works in this way and that individuals can unfairly miss out on vital state pension in later life because they haven’t claimed the benefit.
“The suggestion people should be able to claim back NI credits if they’ve missed out is common sense and the Government should reform the system to ensure that people understand the implications of not claiming child benefit.”
