Simplification? Whom are you kidding?
By Colin Lawson
The pensions industry was revolutionised in 2006 and all the previous complex rules were swept away and replaced by one simple system. This was universally known as ‘pensions simplification’, which came into force with much fanfare on what was termed ‘A-day’ on 6 April 2006.
Now, granted, there were still a few complex areas. But the theory was simple. I could pay in 100 per cent of my earnings, up to £215,000 per annum, as long as my overall pension pot didn’t exceed £1.5m. How simple is that?
If only it had stayed that way. Since then, the maximum pot (known as the lifetime allowance) increased to £1.8m, then decreased to £1.5m, then went down again to £1.25m. If I exceed this lifetime allowance, I get hit with a 55 per cent tax charge.
In terms of contribution limits (the annual allowance), the amount I could pay in went up from £215,000 to £255,000, but it then suffered a huge drop to £50,000 per annum and is shortly due to fall again to £40,000. However, just to add in a little bit more confusion, you can carry forward any unused allowance, which means that (currently) you could make a contribution of £150,000.
Back to basics
Pensions are undoubtedly the best way for us all to save for our retirement, largely because of the tax relief available. But, let’s face it, they are not particularly popular. And with all the constant tinkering around the rules, it’s difficult to answer clients’ basic questions.
If I am recommending a client to invest in a pension, I should be able to answer three basic questions:
1) How much can I put in?
2) How much capital can I accumulate and what income will it give me?
3) When can I get at my money?
Surprisingly, for someone who likes to think they are knowledgeable about pensions, I honestly can’t answer any of these questions accurately. For instance, I paid into my own pension for many years believing that I could access it at 50. However, before I reached that age, legislation changed. Now I can’t access my savings until I’m 55. I predict that this will get put back further before I reach that milestone too.
It’s not just pensions that are stupidly complex and subject to constant change, it’s our whole tax system.
Simple measures
A few years ago, the government appointed the Office of Tax Simplification to review the UK’s tax structure and make recommendations to simplify the system. Despite the findings of the review, things have continued to get more and more complex. One of the recommendations was for income tax and National Insurance to merge because, while they carry different names, they are effectively the same tax.
To demonstrate how complex the tax system has become, let’s have a look at someone’s income. It is possible that you can now pay four different rates of income tax: 20 per cent, 40 per cent, 50 per cent plus the variable percentage on income between £100,000 and £118,800 where your personal allowance disappears.
In addition, there are four different rates of National Insurance on an employed person’s income, ranging from 0 per cent, 2 per cent, 12 per cent and 13.8 per cent.
It is no wonder that Tolleys Tax Guide has doubled in size since 1997 and now stands at a whopping 11,520 pages. The sections covering corporation tax have increased by 185 per cent since 2000 and, if I just want to learn about income and corporation tax, then the combined sections are almost three times the size of War and Peace.
Income tax was introduced as a temporary measure to fund a war. My one hope is that, during peace time, there is a chancellor and a political party brave enough to truly simplify tax so that businesses can focus on looking after their customers and creating value rather than dealing with a constantly changing tax regime.
Colin Lawson is founder and managing partner of Equilibrium Asset Management www.eqasset.co.uk