Webster: Allowance pain: I crave a Simplification sequel

We are rapidlying approach that time of year when we remind clients to make use of all their allowances and make sure any surplus cash is used to top up ISAs and pensions. While ISA allowances are straightforward, pension contribution allowances are anything but.It hasn’t always been this way. Back in the good old days of 2006 we had a nice simple AA of £215,000 for all, no carry forward, which rose to the dizzy heights of £255,000 in 2010/11. It all seems a distant memory…Now we have:• the standard annual allowance (AA)• tapered annual allowance (TAA) • money purchase annual allowance (MPAA) • alternative annual allowance (AAA) Throw in carry forward and the split pension input year in 2015/16 and we have some seriously complexity.It is when we get to the MPAA and tapered AA that things get painful.The MPAA can be grossly unfair in certain specific circumstances. We have had cases where a bankruptcy order was made before the rules changed in 2000. In these cases the Trustee in Bankruptcy (TiB) has the right to take income from the pension when the member turns 55. So someone who went bankrupt in their 30’s could in their 50’s have their annual allowance reduced to £4,000 a year because the TiB starts taking an income, none of which goes to the member. There are instances where a member’s fund could be significantly depleted by a pension sharing order and they have severally limited ability to rebuild their funds.Another not uncommon scenario is someone who gets made redundant in their mid-50s, so may be forced to access benefits to meet living costs, but later finds employment and wishes to replace the funds. Retirement is not the once in a lifetime decision of yesteryear, and moving in and out of retirement is more prevalent, which the MPAA works against. Finally we have the tapered AA. High earners are politically an easy target, but trying to work out an individual’s tapered amount can be complex and time-consuming. It would be far simpler to have a single, lower annual allowance for all. The obvious amount would be £20,000 to align with the ISA allowance (with carry forward still available). This works from the point of view that it is more than enough for the average “man-in-the-street” and the high-earners aren’t costing vast amounts in tax relief. However, it would require a separation of the DB and DC regimes, as it would not be sufficient for many public sector workers with DB accrual, not least of whom those in Westminster. Realistically it could only work if DB schemes were limited by the LTA, and DC by AA.We’ve had MiFID II, and now looking at the annual allowance rules, it makes me crave a Simplification sequel!Lisa Webster is technical resources consultant at AJ Bell

Webster: Allowance pain: I crave a Simplification sequel

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