Budget 2020: Tapered pension allowance – winners and losers.

The pensions annual allowance being slashed to £4,000 for those with income over £300,000 is further evidence of short sightedness in government policy. However, this is welcome news for those in the public sector previously affected at lower income levels.

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Since 6 April 2016, individuals with taxable income in excess of £150,000 have not been able to benefit from the full pensions annual allowance of £40,000. For every £2 of income above £150,000, their annual allowance is reduced by £1. As such, those with income of £210,000 or more have a 'tapered annual allowance' of £10,000. Those people who are affected by the restriction often either have to reduce the amount of pension savings they or their employer make, or they are then subject to an annual allowance tax charge. The primary intention of the tapered allowance was to reduce the amount of tax relief paid to 'high earners'.

To complicate matters further, one also had to consider what one’s 'threshold income' was in a tax year as well as one’s 'adjusted income'. The taper could apply when the former reached £110,000. If as a result of other income/benefits, the total adjusted income exceeded £150,000; their annual allowance would then reduce. This clearly caused problems and perhaps unforeseen complexities for many individuals particularly those in defined benefit/final salary pension schemes such as GPs, consultants and others. Many of the latter were disadvantaged by this and were choosing to retire earlier and/or work fewer hours to avoid tax charges on their pensions.

Bearing in mind the current climate, and concerns around shortages of staff and resources within the NHS, the Chancellor has today announced that he is raising the taper threshold from £110,000 to £200,000 to take effect from 6 April 2020. The annual allowance will only begin to taper for those individuals who also have an 'adjusted income' above £240,000, a marked improvement from £150,000. According to the Chancellor, this will take 98% of consultants and 96% of GPs out of the scope of the taper tax. 

However, as is often the case, there is a sting in the tail. For those with adjusted income above £300,000, the current tapered annual allowance is reduced further to £4,000 making it almost redundant in terms of pension savings for high earners. 

While welcome news to public sector workers, This announcement is further evidence of the continued tendency to meddle with pension savings and cause unnecessary complexity to such an important element of retirement planning. Tapering can be difficult to estimate in advance and for those who are in defined benefit schemes and/or receive employer pension contributions, it is not always easy to plan ahead for potential tax charges. 

The new reduced tapered allowance of £4,000 will mean that for many individuals who may have reached high levels of income later in their career or after building a business, pensions offer little opportunity to build up a reasonable fund for their retirement in a tax-efficient manner.

What should you do?

If you are affected by these changes, it is important to consider your personal circumstances and what you can do to minimise the impact, whether that be by using available allowances from previous tax years or considering alternative methods of saving for the long-term. We would always recommend taking advice on your options in the context of your wider financial planning.

Read more on the Budget here.

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