We’re told to save our money for retirement. That we must strip back our spending today so we don’t endure an old age of unrelenting anxiety, of struggling to get by every day, of closing the door on the outside world because we can’t afford to take part in it.
So we do what we’re told. We slot away our cash as directed, as encouraged, as warned. And we’re penalised heavily for it by a complicated series of outdated rules that have been fiddled with at the coalface without anyone ever stepping back to look at the whole picture. Rules that experts are warning, with increasing volume, are now fundamentally unfit for purpose.
This week, HMRC released figures that show thousands of people are now being hit every year by taxes originally introduced in a piecemeal fashion to deter the wealthy from dabbling in artful accounting.
More than 37,000 people were hit with annual allowance charges in 2017/18 – the tax on any pension contributions made over and above our individual annual allowances in a year.
For many of us mere mortals with average salaries and typical bills, that seems like a nice problem to never have.
For those middle earners in, say, their late 40s or early 50s desperately trying to close a yawning savings gap while they still can after an adult life of having a family, buying a home or two, paying off debts and trying to get the kids through their own early adulthood, it may not.
So far, more than 10,000 savers have paid £173m in these charges for 2017/18 alone. But another 26,550 people have reported contributions worth £812m over their annual allowance via self-assessment. Their tax hit – which could be around £30,600 each – is still on its way.
In total, twice as many people were hit with an annual allowance charge in the 17/18 tax year compared with the year before.
Elsewhere, the same report shows 4,550 people paid £185m in lifetime allowance charges in 2017/18 – the tax on savings above the lifetime pension saving allowance.
“The staggering impact of the Treasury’s pension tax grab has been laid bare by today’s figures,” says Tom Selby, senior analyst at AJ Bell.
“Twice as many people were clobbered with an annual allowance charge in 2017/18 compared with the previous tax year, with hundreds of millions snatched from the grasp of hard-working savers.
“The culprits behind this spike in pension tax are almost certainly the taper, which lowers the annual allowance for high earners, and the money purchase annual allowance, which penalises those who take taxable income from their retirement pot.”
Freedom to lose
The problems don’t end there though, and some of the other raiders of our hard-earned cash are a little closer to home.
Worrying data out this week from the Financial Conduct Authority shows the number of people emptying their pension pots in one go has soared.
Around 350,000 pension pots were fully withdrawn in the last tax year, the figures show, following changes in 2015 that allow people to access their pension funds from age 55 without the eye-watering tax hit.
And though industry commentators are at pains to point out that the vast majority of these were small pots of £30,000 or less, there’s no guarantee that these people have other pots to rely on.
Meanwhile, 40 per cent of those who are gradually drawing an income from their pension pot are taking an average of 8 per cent or more a year. At that rate, they’ll exhaust their savings in a maximum of 12 years.
Regardless of what their other financial and personal circumstances are, the decisions that hundreds of thousands of people are making are being made with terrifyingly little advice.
“The report reveals that nearly half of pension plans were accessed without regulated advice or guidance being taken by the plan holder,” Jon Greer, head of retirement policy for Quilter, says, adding that even if paid-for advice isn’t right for each person, guidance comes at no cost to the public and should be a basic first step before taking cash from their retirement fund.
“Failing to get advice could have disastrous long-term consequences unless you have a very good understanding of the tax landscape and are able to objectively plan a sustainable retirement strategy, which very few people can,” he adds.
“While pension freedoms gave people the opportunity to take control of their own finances this does come with a huge degree of responsibility.
Selby says: “We continue to bang the drum for an independent review of the entire pension tax framework, with a focus on simplifying and encouraging more people to save for retirement.
“Hopefully, once the unholy mess that is Brexit has been resolved, the government can get on with important domestic issues such as this.”
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