The pension input amount is simply the amount of input. It is therefore simple for the member to calculate and determine if there is likely to be tax charge, or if they can pay in more contributions. Unlike the above, there isn’t any calculation to do that involves a variable such as CPI, so it is clear from the outset what is going to be paid in.
A better way
Although all this keeps me in a job, I really feel for those that simply have no idea what the implications of all this are on their retirement.
In many cases, the pension scheme will be able to facilitate the payment of the tax charge, under a regime called scheme pays. However, this will result in a reduction of the member’s benefits at retirement, because the payment will be taken from their benefits either as a monetary amount, or as a debit that will be rolled up to retirement and then deducted. This makes working out what the individual will end up with even more difficult to estimate.
Looking to the future
I don’t like to speculate too much, but the current process feels unsustainable. Given the fact that the tapered annual allowance is becoming ever more complex as we head into each new tax year, something has to give. Personally, I would like to see a simplification of all this and a return to a single annual allowance, at whatever level the government deems suitable. This would then give members a fighting chance of some sensible pension planning, rather than just having to deal with the outcomes that are forced upon them.
The annual allowance and all of its variations appear to be more of an issue for those that historically didn’t need advice on pensions; those in well-funded DB pension schemes. Those people do now need advice, and I have sympathy for those in such schemes. Having high earnings or a generous employer simply means they will need more help going forward.
Pensions, even after ‘pensions simplification’ back in 2006, are getting more and more difficult to deal with. All that said, they remain a very good, tax-efficient way to save for retirement.
Claire Trott is head of pensions strategy at Technical Connection
