The scrapping of the lifetime allowance (LTA) and increasing of the threshold for annual allowance (AA) from £40,000 to £60,000 announced in the Budget leads me to ask: what behaviours are we trying to encourage with tax changes?
If the Treasury had considered what behaviours it needs to incentivise via its pensions tax regime in recent years, it might have concluded the following:
1. We need as many over 55-year-olds to play an active part in the economy for as long as possible (especially NHS workers)
In the case of the NHS’ most senior clinicians, it is very clear we need more of them to carry on working for longer to help chip away at those waiting lists. But it’s not just NHS staff we need to persuade to work longer; they are simply the highly visible ones.
Just recently, the home secretary remarked on the shortage of butchers, while the Financial Times commented on the shortage of passport office staff and I’ve had my own rail journeys cancelled by the shortage of train drivers.
Advisers who have sold annuities may have awkward conversations with clients un-retiring
We need a pensions system that encourages people to work longer. So, the chancellor’s measure of scrapping the LTA is welcome, even if it has only solved part of the problem for those senior NHS clinicians as the AA can still lead to unpredictable tax bills for them.
2. We need pensions money invested in the future of the UK
Pensions offer a transfer of wealth between the generations. So, it’s eminently sensible long-term thinking to invest pension money into the businesses of the future.
New innovative companies – the bright young things of tomorrow – need equity finance to take them through the various growth stages of a business. And in the years to come they will deliver the wealth that will pay good pensions.
Is it not time we had a long look at the pension tax regime?
The freezing of the LTA back in March 2021 worked directly against that virtuous cycle. It encouraged all defined contribution pension savers to move their savings into cash or low return assets in the last few years of work to avoid an unwelcome heavy tax bills linked to exceeding it.
Clients approaching retirement still have 20 to 30 years life ahead of them, so they should be able to take a long-term view to investment, not be encouraged to move more money into low growth, ‘safe’ assets.
3. We may need former workers to ‘un-retire’
This is not just for NHS workers for whom the call was put out early in the pandemic: all sorts of experienced and often senior former employees may find themselves receiving a call asking them to come back to work to lead some project or other. They need to be encouraged to take these roles up.
Advisers who have sold annuities may already have had awkward conversations with clients un-retiring. There is simply no facility right now to say, “hold the annuity payments for a bit, I’ve got a salary again”.
It’s a HM Revenue & Customs rule that annuities cannot be surrendered.
The tax system should not discourage people from coming out of retirement and going back to work
So those who do un-retire can find themselves in receipt of both pension payments and salary payments at the same time, propelling themselves into an uncomfortably high tax bracket. And, of course, they are constrained by the money purchase annual allowance should they have any thought of using that salary to finance personal pension contributions.
The tax system should not discourage people from coming out of retirement and going back to work. Perhaps now the LTA has gone, we can dismantle the framework of benefit crystallisation events that see retirement as only a one-way transition.
In conclusion, is it not time we had a long look at the pension tax regime? I’m sure advisers have dealt with plenty of different retirement-linked conundrums in recent years. They could put their knowledge to work to contribute to a pensions review that reveals where the old rules frustrate, rather than encourage the behaviours society now needs.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
