In the face of mounting evidence that reducing pension tax allowances is hurting more savers than expected, financial planners continue to be frustrated in their calls for reform.
Over the past few weeks, more data has washed up as to the impact cuts to the lifetime allowance, annual allowance, money purchase annual allowance and the taper for high earners are really having.
The amount savers have contributed above the annual allowance on pensions has more than tripled in the past year – the first in which the taper came into effect – and advisers are reporting it as one of the top concerns among clients.
Around a million savers have taken flexible payments from their pensions for the first time since the freedoms, putting them at risk of breaching the MPAA should they wish to top up again at a later date.
It’s not just financial planners that have been up in arms: complaints from doctors reportedly led health secretary Matt Hancock to recently discuss the possibility of exempting the profession from the lifetime allowance with the Treasury.
Regardless of whether you buy the argument that the allowances are a disincentive to saving, or believe they are a way to ensure high earners do not receive a disproportionate share of tax relief, what is clear is that the allowances – particularly the taper and MPAA – are not well understood by consumers.
For all its faults, the Lifetime Isa as a savings vehicle has a far simpler tax and bonus structure than its cousins in the world of pensions. We don’t want people looking to use higher-risk vehicles like enterprise investment schemes or venture capital trusts only because their pension wrapper is full up, and advisers are often engaged far too late in the day.
Reform of the system by scrapping any one of the allowances (ditching the annual allowance in particular could help the self-employed save more in a high-income year) is something that would appeal to many financial planners. But is there any chance of that happening?
The prospects of any significant change look bleak. Reducing a perceived freebie for the wealthy is always going to be a neat sound bite. The government would also be highly reluctant to create any form of carve-out for any special interest group, lest other professions or demographics come banging on the door for the same treatment.
Besides parliamentary arithmetic, there’s also the small matter of £110m in lifetime allowance breach tax clawbacks that the government would have to forgo. An uphill battle indeed, but planners can only keep banging on the door.