- The Government is facing calls to embed the “principle of simplification” when making tax policy decisions (Review of simplification: Approach and interpretation - GOV.UK (www.gov.uk))
- Few areas of public policy have seen tax complexity grow in recent years more than pensions
- Tinkering by successive administrations has created muddle of pension tax allowances, including:
- The annual allowance
- The money purchase annual allowance (MPAA)
- The tapered annual allowance
- The lifetime allowance – including 7 (SEVEN) forms of lifetime allowance protection
- Complexity has also crept into the UK’s ISA regime, with various versions designed to achieve slightly different aims
- Government urged to consider a “bonfire” of complex rules so savers who engage with their retirement pots have a fighting chance of understanding their options
Tom Selby, head of retirement policy at AJ Bell, comments:
“Complexity is the enemy of good policymaking and often leaves retirement savers bewildered before they have even got going.
“Depending on their earnings and personal circumstances, it is possible savers will come into contact with no fewer than three versions of the annual allowance, as well as the fiendishly complex lifetime allowance – not to mention the seven lifetime allowance protections, which result from repeated tinkering by successive administrations.
“Although clearly the Treasury needs to control tax relief costs, it is hard to imagine any right-minded person would create a system like the one we have today if they started with a blank sheet of paper.
“The money purchase annual allowance (MPAA) is poorly understood. Anyone who needs to access their retirement pot post-55 during the cost-of-living crisis risks struggling to rebuild their savings because of it.
“The tapered annual allowance is a nightmare to navigate and has heaped pressure on the NHS, with senior doctors considering early retirement to avoid a pension tax hit. This illustrates that tax complexity is not only a headache for those directly impacted, it can have unintended consequences that create greater harm.
“The lifetime allowance is effectively a tax on investment performance, with large swathes of middle Britain likely to be dragged into its orbit in the coming decades.”
Bonfire of tax complexity
“In short: the system is a bit of a mess and we need a bonfire of unnecessary pensions complexity. While some of this complexity only directly affects a small proportion of the population, all of these rules need to be covered in retirement communications as they could affect different people at different times.
“With automatic enrolment introducing millions of people to long-term saving for the first time and Government initiatives such as Pensions Dashboards aimed squarely at boosting levels of engagement, the Treasury needs to make sure the pension tax rules are fit-for-purpose when that engagement wave comes. There is a strong argument for a formal, independent review of the current regime with the aim of simplifying the rules and encouraging more people to save for retirement.
“This could consider the merits of moving to a system whereby defined contribution (DC) pensions are controlled by a single annual allowance and defined benefit (DB) pensions by a single lifetime allowance.
“The ISA regime could also benefit from radical simplification after years of creeping complexity. We believe the benefits of the various different versions of an ISA could be wrapped into a single One ISA* product, at a stroke making it easier for people to understand and engage with their savings.”
*You can read more about AJ Bell’s One ISA proposal here: AJB_policy_paper.PDF (ajbell.co.uk)
