High net-worth individuals will be familiar with the tapered annual allowance and its potential to restrict pension contributions.
They will probably welcome the news that the Treasury is set to review it in the coming months, although nobody knows when given recent political turmoil.
In most cases, the amount of tax-free contributions a high earner can put into a pension stands at £40,000 in 2020/21.
The tapered allowance applies to people with a taxable adjusted income of more than £150,000 a year and a threshold income over £110,000.
For every £2 of income an individual earns over £150,000, their annual allowance is reduced by £1, down to £10,000.
Anyone whose annual pension contributions exceed their annual allowance will be taxed. For some high earners, this has caused significant and unexpected charges.
THE REASONS FOR A REVIEW
The decision to review the tapered annual allowance was fuelled by politics, particularly staff shortages within the NHS.
The rules, which took effect in April 2016, have caused tax bills for some NHS clinicians to skyrocket. To avoid high tax charges, increasing numbers of professionals have turned down extra shifts or left the NHS pension scheme altogether.
In July 2019, the Department for Health and Social care put forward proposals to increase the scheme’s flexibility by allowing clinicians to halve their pension contributions in exchange for halving the rate of pension growth.
This was met with negative reaction from professional groups, including the British Medical Association (BMA).
In August 2019, the Government replaced the earlier proposals with a new consultation, offering clinicians “full flexibility” in the way they make their pension contributions.
At the same time, the Treasury has said it will “review how the tapered annual allowance supports the delivery of public services such as the NHS”.
HOW ARE OTHER PUBLIC SERVICES AFFECTED?
Other services including the police, firefighters, judicial services and the armed forces have reported members of their pension schemes being affected by the rules.
A report in the Telegraph claimed four in ten long-serving chief superintendents were considering leaving their posts due to higher pension payments they receive for long service were falling foul of the annual allowance.
As the health service has been the main focus of the Government’s response so far, it remains to be seen how the new review might apply to other public services.
However, unions representing dentists and firefighters have already threatened legal action against the Government if the review isn’t applied to their members.
SHOULD IT BE SCRAPPED?
The BMA says the “only realistic solution” to the problem is to scrap the tapered annual allowance for defined benefit, or final salary, pension schemes.
Meanwhile, mutual insurer Royal London has argued the taper should be scrapped for people in all areas of work.
Steve Webb, director of policy at Royal London, said:
“A review of the tapered annual allowance is long overdue. It must be comprehensive and cover everyone affected by this absurdly complex taper, including in the private sector. The best solution by far would-be outright abolition, even if this meant a slightly lower annual allowance across the board.”