‘Our pension system works on the basis that an individual is rewarded when saving for a pension, as tax relief is given on contributions. The investments within the pension grow in a tax-free environment and tax is only paid when the pension is received.
‘With auto-enrolment taking effect from 2012, nearly all employees are now making pension contributions, and likely from an earlier age than they would have in the past. In other words, they will be building up the value in their pots for a longer period compared to pre-2013 position.
‘With income tax relief costing the Treasury nearly £39bn annually, successive Chancellors have made a habit of fiddling with the pensions system in an effort to reduce the annual cost. We now have restrictions on the amount contributed annually and the value that the pension pot can grow to. If you breach either of these limits, then tax charges arise, some at penal rates.
‘Today’s statistics show that in 2016/17 there was a dramatic 54 per cent increase in comparison to the prior year in the penalties charged where the value of the pension pot has grown too big. Even more dramatic is a whopping 360 per cent increase in the amount of contributions which exceeded the annual allowance.
‘Part of the latter increase can be explained by individuals not adjusting the amount of their contributions following the introduction of tapered annual allowance which affects high earners. This involves a fiendishly complicated set of calculations to work out if your net income is more than £150,000. Where it is, you also have to calculate how much of your annual allowance you will lose. Individuals who have been stung in one year will no doubt look to reduce their future contributions, but the clawback of relief in 2016/17 will be a nice windfall for the Treasury.
‘The purpose of contributing to a pension over a long period is to benefit from growth in the investments. But the lifetime allowance charge seeks to penalise those whose pots grow ‘too’ big. In other words, individuals are being penalised for making good investment choices. This certainly sounds like the Treasury wants to have its cake and eat it.
‘In the forthcoming Budget, the Chancellor has an ideal opportunity to abolish the lifetime limit, which was misconceived from the outset. Unfortunately, chances of this actually happening are relatively slim.’