George Osborne stuck his head above the pulpit today to deliver the Autumn statement. Perhaps the most predictable lynching of the year, with a general acknowledgement that things aren’t going as well as planned or expected. Many will say how they would have done things differently – but of course this is a rather academic debate and consigned to ancient history. As a consequence there is going to be more pain and more goalpost moving.
Lifetime Allowance cut by £250,000
A significant goalpost move which will have a direct impact on our clients regards pension allowances. The last Government devised “pension simplification” which as I have said before was a complete mess, resulting in ever more complication not less. They established a total lifetime allowance for the value of pension funds of all descriptions. Back in 2006 this was set at a pot worth £1.5m – with excess tax charges for those over this unless they had applied for HMRC protection (on the condition that no further payments to pensions were made – broadly speaking). The allowance crept up to £1.8m and was cut back to £1.5m at the start of this tax year as part of “austerity measures”. Today this has been trimmed even more by £250,000 to £1.25m for the 2014/15 tax year. This makes larger pension pots more likely to be taxed and creates a serious concern for those approaching this figure.
Annual Allowance reduced by 20%
In addition the annual allowance which was £255,000 a year was shrunk to £50,000 is going to be reduced further to £40,000 for the 2014/15 tax year. Ok this is a lot of money to many people, but is doesn’t look like a a system designed to encourage saving for a pension. In fact it looks like exactly the opposite. This sort of Government meddling is very unhelpful to anyone attempting to become financially independent. Restrict one or the other, but not both. I am sorry to say that I find our tax system rather daft. There are so many rules and rates of tax that this promotes an approach of tax minimisation wherever possible. This could be so easily resolved, should any politician have courage (which they don’t) by introducing a single rate of tax on all forms of income and ensuring that UK earnings were taxed in the UK. The solution is worryingly simple – remove the incentive to find the lowest rate of tax by making the tax rate the same for everyone.
Warning for high earners and NHS Consultants
Unfortunately, this latest round of goalpost moving will hit many high earners (such as Consultant Doctors) that are members of a final salary scheme (such as the NHS Pension) who have their annual allowance assessed a little differently (based on the notional rise in the value of their pension). Tax charges may apply and retiring before 2014/15 may now be a way of avoiding a penalty on £250,000 of 55% (£137,500) if you don’t have Fixed or Enhanced Protection. So more need for expert advice…