The Office of Tax Simplification (OTS) has said that the UK government should review pension annual, lifetime and Money Purchase Annual Allowances (MPAA).
The independent body to the government also said in its report, Taxation and Life Events: Simplifying tax for individuals, that HM Revenue and Customs (HMRC) should play a full part in helping to ensure that guidance on the tax consequences of particular pension arrangements and choices are clear and available to all concerned.
Steve Webb, director of policy at Royal London said: “This report by the highly respected and independent Office of Tax Simplification makes a great deal of sense.
“It has highlighted several areas where the tax system causes complexity and unfairness for ordinary taxpayers.
“Ideally, the Government would listen carefully to this report and make changes.
“But in the past, HMRC has treated OTS recommendations with contempt, ‘marking their own homework’ and deciding that nothing needs to change.
“I hope that this time the watchdog will have some teeth and the government will listen.”
Lifetime and annual allowances
In regard to annual and lifetime allowances, the OTS said that the UK government should review these and how they deliver against their policy objectives.
In 2016, the UK government introduced the tapered annual allowance which gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.
The report mentioned that the UK government should “take into account of the distortions they sometimes produce”.
This includes applying different pension allowances to taxpayers depending on whether they are saving into a defined contribution scheme or a final salary plan, as it said those with DC schemes find it difficult to forecast growth for lifetime allowance purposes.
This is because these type of pensions not only grow through savings but also by the growth of the value of the investments in the fund.
The Lifetime Allowance is £1.055m for the 2019-20 tax year and the annual allowance is £40,000 for the 2019-20 tax year.
MPAA
The OTS also said that the government should review the operation of the Money Purchase Annual Allowance, which is the amount that can be paid in one year to your money purchase arrangements without a tax charge applying.
The independent body said it should, in regards to the MPAA, also gather better evidence, consider whether it meets its policy objectives, is set at the right level and is sufficiently understood, given the present potential for disproportionate outcomes.
For the 2019/2020 tax year, the MPAA will be £4,000.
Aims
Kathryn Cearns, OTS chair, said the aim of the report was “identify issues which cause the greatest or most frequent sources of complexity or difficulty to taxpayers, agents or HMRC”.
“Such issues are likely to be those which cause the most error or inadvertent non-compliance, resulting in additional costs for all concerned,” she added.
“The OTS hopes that this report will promote a constructive dialogue between government and stakeholders about the issues identified.”
Nightmarish complexity
Tom Selby, senior analyst at AJ Bell, said: “This latest report lays bare the nightmarish complexity facing savers attempting to navigate the UK pension tax system.
“It is frankly bizarre that savers now have to get their heads round an annual allowance, money purchase annual allowance, tapered annual allowance and lifetime allowance, all of which could apply to people at different stages of their life.
“Some of these measures have serious consequences. The taper, for example, is placing huge strain on the NHS as senior doctors are forced to refuse extra shifts to avoid eye-watering tax bills. The MPAA, which is poorly understood, severely punishes those using the pension freedoms, reducing their annual allowance from £40,000 to just £4,000.
“We know this complexity puts people off pensions and the Government now needs to put simplification at the heart of its savings agenda.
“Rather than looking at these issues in isolation, policymakers should convene a commission tasked with simplifying the system and encouraging more people to save for retirement.”
Tax education
Elsewhere, the report said the HMRC should collaborate more with relevant external bodies, including schools and in further and higher education, to improve the public’s understanding of tax and finance.
OTS said that HMRC should also extend its collaboration with academic researchers to quantify the effect of its tax education programme and explore the potential for a cost/benefit measure to allow HMRC to prioritise and target its tax education resources.
“Everyone involved – in schools and in further and higher education, employers, tax advisers and HMRC – needs to work together to help improve overall awareness and understanding,” said Bill Dodwell, OTS tax director.
“The OTS encourages HMRC to continue and expand its work in this area and involve a much wider group of organisations.”
Rachael Griffin, tax and financial planning expert at Quilter, added: “Awareness and understanding of tax is limited in the UK and this creates vulnerability for the public and challenge for HMRC.
“So, as the OTS highlights, it’s in everyone’s interest to improve the public’s understanding. The best outlet for the upcoming generations is to implement financial education in primary schools.
“Research shows that 68% of primary school students who showed little capacity for delaying gratification initially, did so at the end of financial education classes.”
