The pensions industry is calling for a review of pension taxes and allowances as part of the new chancellor’s pledge to simplify the UK tax regime and stimulate growth.
The new chancellor Kwasi Kwarteng said lowering taxes and simplifying the current complex regime would be one of the key aims of the new government. To this end he has abolished the separate Office of Tax Simplification and announced this simplification principles will be adopted within all government departments, including HM Treasury.
Leading pensions commentators said that the pensions systems is a good place to start with this project. AJ Bell head of retirement policy Tom Selby says: “There are few areas crying out for radical simplification more than pensions.
“The current pension tax system comprises no fewer than three versions of the annual allowance, a lifetime allowance and seven different forms of ‘protection’ created as a result of repeated cuts to the lifetime allowance since 2010.
“Non-earners are subject to another different annual limit, while the tax system simply doesn’t work properly with the pension freedoms introduced in 2015, with millions of people being overtaxed on their first withdrawal.
“Nobody in their right mind would create a pension tax system this complicated from scratch, and this complexity undoubtedly acts as a barrier to people engaging with their retirement pot and saving for the future. The government must seize this opportunity to consider real simplification, with the central aim of encouraging more people to save for their future.
“There is merit in exploring moving to a framework where there is a single lifetime allowance for defined benefit pensions and a single annual allowance for defined contribution pensions.
“Clearly there would be issues to be ironed out as part of this – for example in relation to people who have both DB and DC pensions – but it has the potential to be infinitely simpler than what we have right now.
“Millions of people have now been introduced to pension saving by auto-enrolment, many for the first time. As their pots grow and initiatives like pensions dashboards aim to boost engagement, we need to ensure the rules they engage with can be understood.”
Others have also called for the chancellor to look at the “overly complex” pensions tax system. Abrdn’s head of industry change Alastair Black says this can act as a barrier to clients investing and saving for the future – and he called specifically for reform of the lifetime annual allowance and money purchase annual allowance.
Meanwhile Jenny Holt, managing director for customer savings and investments at Standard Life, part of Phoenix Group adds: “While the Chancellor has been quick to reverse many of his predecessor’s policies, one change where we’ve seen no movement is in relation to the pensions lifetime allowance which is currently frozen until 2026.
“In a high inflation environment the real value of what people can save in their pension is falling and the health secretary yesterday set out measures designed to help retain higher earning NHS employees facing this challenge. If current rates of inflation continue, the current freeze is likely to come under more pressure.”