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Govt called upon to address complicated pensions landscape

13 October 2019

The Office of Tax Simplification has called for the UK government to review its “complicated” pension rules and ensure clear guidance on the tax issues is made available to pension savers. 

As part of its Life Events review: Simplifying tax for individuals report, the independent body urged the government to review the annual and lifetime allowances and how they deliver against their policy objectives, taking into account the distortions they can produce.

The OTS has also called for the government to review the Money Purchase Annual Allowance, considering whether it meets its objectives, is set at the right level and is sufficiently understood.

Tom Selby, senior analyst, AJ Bell, said: “This report lays bare the nightmarish complexity facing savers attempting to navigate the UK pension tax system. It is frankly bizarre that savers now have to get their heads round an annual allowance, money purchase annual allowance, tapered annual allowance and lifetime allowance, all of which could apply to people at different stages of their life.

“Some of these measures have serious consequences. The taper, for example, is placing huge strain on the NHS as senior doctors are forced to refuse extra shifts to avoid eye-watering tax bills. The MPAA, which is poorly understood, severely punishes those using the pension freedoms, reducing their annual allowance from £40,000 to just £4,000.

“We know this complexity puts people off pensions and the government now needs to put simplification at the heart of its savings agenda.”

In addition, the report also highlights issues arising from employers having the choice between ‘net pay’ and ‘relief at source’ arrangements when providing pensions for their employees. Unfortunately, the different mechanism involved means that people whose income is below the personal allowance are not as well off overall if their employer opts for a net pay scheme.

In an effort to tackle the issue, the OTS recommends considering the potential for removing or reducing this difference in outcomes, without making it more complex for those affected.

Selby says that rather than look at each issue in isolation, policymakers should “convene a commission” tasked with simplifying the entire system and encouraging more people to save for retirement.

Rachel Griffin, tax and financial planning expert, Quilter, says: “A systematic review of pension taxation would be highly welcome and a good chance to evaluate how all the allowances interact and impact how people are saving.”

However, Steve Webb, director of policy, Royal London, cautioned that the review may not lead to change.

“Ideally, the Government would listen carefully to this report and make changes. But in the past, HMRC has treated OTS recommendations with contempt, ‘marking their own homework’ and deciding that nothing needs to change. I hope that this time the watchdog will have some teeth and the government will listen.”

The report, which makes 15 recommendations in total to help tackle complex tax issues, also addressed the contentious High Income Benefit Charge.

The tax charge, introduced in 2013, applies where an individual or their partner receives child benefit and one has an income of over £50,000 a year. While some parents choose not to claim the benefit, this can mean losing out on national insurance credits towards the state pension and the child will not automatically receive a national insurance number when they turn 16.

Bill Dodwell, tax director, OTS, said the charge remains “inherently confusing” and recommends the government reviews the administrative arrangements involved to improve the situation as well as look at those who have lost out since 2013.

Griffin said: “The counter-intuitive nature of claiming child benefit has been highly reported and it’s encouraging to see the OTS acknowledge this needs to be amended. Along with their recommendations they should allow parents to backdate NI credits for more than the current three month period.

“A sleep deprived overwhelmed new parent is presented with reams of new responsibility and information. There will be numerous things on their mind, but what isn’t likely to be one of them is their state pension. In fact that’s unlikely to cross their mind until they come up for air, which could take months. And yet the government is claiming that three month leeway on appropriately filling out a child benefit form is enough. This limited timeframe is even more absurd when you consider that parents who are subject to the High Income Child Benefit Charge, and therefore don’t need to claim child benefit, still need to fill out the form so they can get NI credits.

Selby commented: “It’s good the OTS have identified that it’s ‘unreasonable’ the system works in this way and that individuals can unfairly miss out on vital state pension in later life because they haven’t claimed the benefit.

“The suggestion people should be able to claim back NI credits if they’ve missed out is common sense and the Government should reform the system to ensure that people understand the implications of not claiming child benefit.”

The OTS has said that some of the problems individuals face in interacting with the tax system stems from a lack of tax education and awareness. It has called for employers, tax advisers and HM Revenue & Customs to work together to help improve overall awareness and understanding.

Griffin added: “Awareness and understanding of tax is limited in the UK and this creates vulnerability for the public and challenge for HMRC. So, as the OTS highlights, it’s in everyone’s interest to improve the public’s understanding.

“The best outlet for the upcoming generations is to implement financial education in primary schools. Research shows that 68% of primary school students who showed little capacity for delaying gratification initially, did so at the end of financial education classes.”

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