I am not sure that I agree that pensions should attract tax relief at all – why force people into relatively inflexible long term savings that they cannot get at if their health or financial wellbeing takes a turn for the worse mid-career? Why bias the financial system towards one type of savings structure to the disadvantage of others?
However lets face it without tax relief we would have no private pensions system in the UK worth talking about.
Given that we have tax relief it must make sense to limit the amount of relief any individual can receive.
The proposals put forward by the previous UK government were ludicrously complicated building on top of the shambolic “pensions simplification” introduced from 2006.
Well the new rules announced today by the UK Treasury are very sensible. £50,000 a year for the new Annual Allowance seems like a reasonable figure. Owners of small businesses and others with highly variable earnings will be able to claim unused relief for previous years which will allow them to make meaningful contributions when the opportunity arises.
The vast majority of those in final salary pension schemes will suffer no effect at all – only those with large pensions and/or significant salary increases will be caught. A few commentators have trotted out the old another nail in the coffin remarks about final salary schemes (a bad day for final salary schemes today it would appear since the NAPF’s closure of its final salary scheme is a further nail in the coffin according to Money Marketing, or maybe it is a bad day for journalism!)
My independent trustee colleague Andrew Mitchell recently wrote an article about the mess the current government made to its first change to pensions policy in replacing RPI with CPI for pensions indexation.
Whilst the Daily Mail predictably refers to the change as “the big squeeze” this, the government’s second major pensions policy announcement, is straightforward, simple and well thought out – congratulations on getting this one right! We may well wait quite while though before we see an increase in the £50,000 Annual Allowance or in the new Lifetime Allowance of £1.5 million!
UPDATE – For a more detailed analysis of the tax changes to UK pensions see this subsequent article by my colleague Ian Morrice.
Brian Spence is a founder of actuaries Spence & Partners Limited and a director of independent trustee Dalriada Trustees Limited. You can follow him at @briandspence or@PensionsEndgame on Twitter or link to him on LinkedIn.