Pension tax rules are complex

October 30, 2019

Enable’s IFA’s in Bishop’s Stortford agree with Helen Morrissey, pensions specialist at Royal London, that our current pension tax system can feel very complex. Saving for a pension is important and understanding the tax rules around pensions are equally important in financial planning.

Recent CPI inflation figures have given a welcome boost of almost £18,000 to the Pension Lifetime allowance as it rises in line with inflation. But unlike the lifetime allowance, the annual allowance has remained frozen at £40,000 since the 2014/15 tax year.

The annual allowance currently puts a cap of £40,000 on the amount you can save into a pension every year and still receive tax relief. Both the lifetime and annual allowances used to be much higher. Only back as far as 2011/12 tax year, the lifetime allowance stood at £1.8m, while in 2010/11, the annual allowance was £255,000.

All the changes that have been brought about since then so the UK Government can save the amount of money it gives away in tax relief has led to a complicated protection regime brought in to protect savers who already saved more than the new limits.

On top of this, a carry forward regime allowed people to make use of any annual allowance they may not have used over the previous three tax years. After the 2015 shake-up of pension access, the Money Purchase Annual Allowance (MPAA) was also introduced to stop people pension recycling. The resulting system is ridiculously complex and pretty much impossible to navigate without independent financial advice.

One outcome of the tapered annual allowance has caused real issues within the NHS. Many doctors and consultants have been cutting back their hours as they are inadvertently breaching the pension limit and therefore incurring sizeable tax bills. Until changes can be put in place to simplify and bring clarity to people’s retirement planning Enable’s IFA’s can help you work out your best course of action.

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