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New data today illustrates how complex pension rules imposed by the previous Chancellor, George Osborne, in the 2015 budget are impacting the armed forces alongside judges and the NHS.
A freedom of information request from Quilter shows that 3,840 members of the armed forces pension scheme breached their annual tax-free pensions savings limit in 2017/2018.
This represents a fourfold increase on the 1,010 personnel who breached the allowance in 2015-16. The number of breaches peaked at 3,920 in 2016-17.
It adds to the growing case against the government’s controversial pension annual allowance taper, which has already created resource strain in key services such as the NHS, where senior clinicians are facing huge tax bills due to the policy.
The annual allowance affects individuals saving into a pension and restricts the amount they can save in any given year before facing a tax charge. The annual limit was in excess of £250,000 as recently as 2010/11. But it has since been cut dramatically and now stands at just £40,000. Contributions in excess of the annual allowance are subject to a tax charge, which is borne by the individual or paid for under a ‘scheme pays’ arrangement, which leads to a reduction in pension benefits.
For higher earners an additional ‘taper’ brings the allowance down further. Introduced in 2016, the policy sees savers lose £1 from the annual allowance for every £2 of remuneration over £150,000, with complex rules involved in calculating the ‘threshold’ and ‘adjusted’ income to determine who is subject to the taper. It reduces down to just £10,000 for individuals with total earnings of £210,000 or more.
Certain public sector workers in defined benefit (DB) pensions are particularly vulnerable. This is due to the way benefits accrued under a DB pension are calculated, and means a worker can easily see their pension accrual docked under an annual allowance tax charge.
Further to this the scheme gives members a chance to apply for a ‘scheme pays’ option. However, it was only used by around 10% of those in the armed forces pension scheme exceeding the tapered allowance last year, potentially indicating that it offers little protection against members hit by a tax charge and that more needs to be done to promote it.
The new data from the armed forces pension shows how the issue is impacting multiple public sector employers and staff. As well as the widely publicised impact on the NHS, a previous freedom of information request from Quilter shows that around 25% of judges breached the annual allowance on pension contributions in 2017/2018.
Quilter financial planner David Gibb says:
“What started as rumours of senior doctors declining extra shifts due to relatively obscure pension tax rules has now spiralled into a staffing crisis across public sector employers including the NHS, the judiciary and now the armed forces.
“It has led to a situation where key public services professionals are put in a position where they prefer to decline overtime, reduce their hours or consider early retirement.
“This is all down to the unintended consequences of a poorly thought through tax reform designed to reduce government expenditure on pension tax relief for higher earners. What policymakers failed to recognise was the disastrous knock-on effect this would have on public sector pension schemes in particular, where the nature of pension entitlement calculations means that employees can face punitive tax bills running into the thousands.
“Government ministers seem determined to try and keep the tapered annual allowance in place and create workarounds in public sector schemes. This is the wrong approach and the Treasury should scrap the taper altogether as a matter of urgency.”
Quilter plc is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow.
Quilter plc oversees £110.4 billion in customer investments (as at 31 December 2019).
It has an adviser and customer offering spanning: financial advice; investment platforms; multi-asset investment solutions; and discretionary fund management.
The business is comprised of two segments: Advice and Wealth Management and Wealth Platforms.
Advice and Wealth Management encompasses the financial advice business, Quilter Financial Planning; the discretionary fund management business, Quilter Cheviot; and Quilter Investors, the Multi-asset investment solutions business.
Wealth Platforms includes Old Mutual Wealth UK platform and Old Mutual International, including AAM Advisory in Singapore.
The Old Mutual Wealth Heritage life assurance business was acquired by ReAssure Group Plc on 2 January 2020.
Since its IPO in June 2018, Quilter plc’s businesses have progressively rebranded to Quilter, as follows:
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