The new tax year sees yet another adjustment to the rules governing tax relief for registered pension schemes. As the current regime celebrates its tenth anniversary, one of its principal objectives, a simplification of the tax rules, now seems a cruel and ironic joke. There will now be no fewer than seven different forms of protection to mitigate the impact of a reduced lifetime allowance.
Implementing tapered relief for the annual allowance will present a serious challenge for scheme administrators. An additional layer of complexity will be difficult to communicate to employees, but with a growing number of individuals being caught by constraints within the tax system, it is important that the implications are fully understood by those affected.
An important point to note is that the decreases to the annual and lifetime allowances are now such that they do not affect just those who are highly paid. It has been calculated that an employee in his or her 30s with a current pension pot of £40,000, making gross contributions of £1,000 a month, is entirely likely to be caught by the annual allowance before reaching state pension age. The tapering of relief for the annual allowance means that many, especially those accruing benefits within a defined benefit (DB) scheme, will find themselves subject to a retrospectively-calculated tax demand in 2017.
Communications to employees will, therefore, have to strike a careful balance. On the one hand, effective retirement planning remains crucially important for employees and any message that appears to undermine the importance of pension saving is to be avoided. Employees must, however, have an informed long-term view of the impact of changes to the tax rules and this applies as much to those in the early stages of their careers as to those whose accrued pension savings will be in excess of the new lifetime allowance come April.
Tim Middleton is technical consultant at the Pensions Management Institute (PMI)