The amount of whingeing from the “wealth” end of the pension market about reducing the annual allowance for those in drawdown from £10k to £4k gives credence to Osborne’s capitulation to major pension taxation reforms.
Though only a tiny number of people continue to fund pensions once they’ve drawn them, the loophole is one that advisers like to exploit. People get double tax relief and double tax-free cash, that’s good for the wealthy and advisers but not good for the Exchequor and the JAMs.
The arguments for leaving things be seem to boil down to
- the entitlement of the well-planned to have their plans realised
- the cost of reprinting the taxation rulebooks
I have zero sympathy for either argument. The Treasury made it clear when cutting the AA for those in drawdown to £4k, that this was not the end of the story. Clearly the Treasury numbers are showing that this double tax-relief is suffeciently expensive to stomp on it. If the Treasury are to criticised , it is for not having the courage to to to £4k or even £0k for this group – at outset.
If plans had been made , they should have had the flexibility to respond to the intentions of the Treasury to review. If literature had been written , let us hope that the print runs were short!
There a case for a larger allowance – but it’s about a deferred pension.
Putting aside my natural aversion to tax arbitrage, I have tried to see the upside for the Government in allowing people to double dip on tax relief. I have failed.
It is not in most people’s interests to draw their pension down earlier than they need. People are better off staying in funds and deferring drawdown; doing so improves the size of the pot, reduces the period an income needs to be paid and benefits the potholder through tax-free growth. The full annual allowance is available to the wealthy who keep their hands off their pension.
The definition of pension wealth is £250k according to most wealth managers, ironically rather less than the cost of promising the state pension (were one to try to replicate it. Nobody is talking of those in receipt of a full single state pension as pension wealthy and people who think they are “retirement ready” with £250k in the pot are being flattered by advisers. The vanity of having a wealth adviser will not however convert an inadequate pot into a proper pension. Indeed the cost of wealth management may do quite the reverse.
Tough love from advisers is needed. Far better to explain the advantages of deferring drawdown than creating the illusion of sufficiency.
Patience is a virtue
Freedom to do things the right way includes the freedom to fuck up. But we shouldn’t be rewarding stupid behaviour (precipitous drawdown) with a recycling tax bonanza.
For advisers – the message from Government must be “advise restraint”. For those in drawdown the message is clear – double tax-relief is on it’s way out, if you want a pension early then be prepared for less pension in years to come. There are still tax-breaks for your long-term savings , but they’ll be from the ISA and not the pension tent.
Sit down – shut up!
There are people being unfairly treated by the pension contribution system. Those on low earnings who cannot get tax relief under “net pay”, those whose earnings are too small to get access to an employer contribution (those “entitled” to nothing).
But the wealthy and pseudo wealthy who drawdown pensions into other pensions are not being treated unfairly. They are chancers gaming the system.
Overall I might agree. But. This is Yet Another Change to rules. And the rules are what folk have been planning around. Change them often enough and pension planning becomes impossible and pensions suffer reputational damage. Pension saving is a multi-decade operation, but pension rule meddling is a bi-annual event for the government at present.
And at this point we are far, FAR past “often enough”, and pensions have become a thoroughly tarnished brand. It’s not like pension “double-dippers” were breaking any rules — these allowances were codified by a government who knew what they were doing (we should assume, although personally I doubt it!). You claim the well-off can use their full annual allowance, but you forget the taper. And the “tax-free” growth you posit is in fact taxed on withdrawal, so merely deferred. And the lifetime allowance can hole everything below the waterline at the last minute anyway.
So yes, these folk might be ‘chancers’, but they are VERY few in number. And which of us would pass on such an opportunity were it openly offered by intentional legislation, anyway? Moreover, the change made in the Autumn Statement does absolutely nothing to address the other flaws with pensions, such as “net pay”, that you mention and which DO need fixing, making this change simply classic governmental misdirection that takes attention away from the real issues.
With a bit of reflection, you might be able to understand that there could be occasions when fixing a mildly flawed status-quo is worse than just leaving it alone.