Our Solution to Lifetime Allowance Annual Allowance Problem

Published / Last Updated on 11/02/2020

Why we hate the Annual Allowance and Lifetime Allowance  ....

The annual allowance can penalise members of defined benefits schemes who have modest increases to pension entitlement in a single year due to a promotion, pay rise or simply working too many hours discouraging people from working too much such as those problems faced by the NHS.  E.g. a Junior doctor gets promoted as well as working too many hours and their pension entitlement in one year increases by £3,000pa.  The equivalent for annual allowance is 3 X £16,000 = £48,000 meaning they exceed the annual allowance of £40,000 by £8,000 and get a huge tax bill.  Or indeed, if they are high earner surgeons, consultants or specialists, they only have a tapered annual allowance of just £10,000 meaning in the above example £38,000 would be a taxable excess just for getting a pension increase of £3k pa.

Similarly, for investment linked and defined contribution company and personal pensions, if you get too much growth over the years and you finished with a pension pot larger than the Lifetime allowance of £1.03m, you face a tax charge.  At some point people are discouraged from saving or discouraged from investing pension funds to get growth, when in reality the government should be pleased that their pension funds are bigger so that they pay more income taxes in retirement. 

A simple solution would be to remove the annual allowance test for defined benefit pension schemes and also remove the lifetime allowance tax hit when getting good investment growth on investment linked pensions such as defined contribution and private pension schemes.

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