MPs pushing for More Pension Smoke and Mirrors

2011: The Sunset Limited - Lee Jones

Financial Planners remain unimpressed with moves to further restrict pensions. As I blogged on Monday, the Chancellor is being petitioned by various MPs to reduce the annual allowance from £50,000 to a lower sum both £30,000 and £45,000 have been mentioned.  Don't forget that the annual allowance was £255,000 and was reduced to £50,000 from April 6th 2011. So dramatic actions are now a precedent. The amount of tax saved in not providing tax relief, can be used to justify raising the personal allowance to £10,000. This is decidedly bad news for pensions as I outlined in my piece on Monday "Pensions and the Muppet Show". This is more of the same. However examined, this is not about saving tax, it is about appearing to do so. It is all to do with appearing to help lower income earners. The personal allowance has been raised, true - for everyone, true, but higher rate taxpayers have not benefited as the amount of earnings required before a 40% tax rate applies has been reduced. Anyone earning £100,000 or more can see their personal allowance completely removed and those with incomes over £150,000 pay 50% tax as it is.

What the politicians have not thought about is that Occupational Pension Schemes - in particular final salary schemes do not apply the actual amount contributed towards the pension as part of the annual allowance. Indeed the rather daft calculation involves working out how much the pension has increased, making an adjustment for inflation and then multiplying by a factor of 16 to calculate the element of the annual allowance used. This makes planning very difficult as most Final Salary Schemes are not geared up to provide the information in time for tax year end deadlines. Further messing around just makes things harder and ends up making additional work accounting for things rather than doing anything productive. I hope that George Osbourne will see sense and not introduce further restrictions on pensions. If he wants to make changes, my suggestion would be to scrap the lifetime allowance and restrict tax relief to 20% of all contributions, irrespective of earnings. This would at least make funding a pension a worthwhile exercise.

In the meantime, expect the media to be full of articles this weekend about ending higher rate relief or the annual allowance being reduced. Pension companies will be quick to point out that if you have money for investment, now is the time to act, use the allowance now before it gets removed (before 5th April 2012 presumably). Nothing quite like a fire sale and I've known this industry to create a few and invariably nothing changes. However, this time the current general antagonism towards those with large incomes despite the economic recession, is holding court with politicians who seem to be very concerned about appearances.