Since I first started working in the advice profession in September 2008 the pension rules have vastly improved. Saving into a pension has now become a no-brainer for the vast majority of people.
However the one rule I really dislike is the tapered annual allowance for high earners. Not only can it be quite complicated to calculate but it also penalises savers looking to build up a future retirement pot.
Of the clients we serve at Ifamax, our barrister clients are probably hit hardest by the new rules. They come in all shapes and sizes but the typical problems faced by barristers (and many other self-employed individuals) are:
- They are effectively running their own business.
- They have no business to sell at retirement.
- They have to generate all turnover themselves.
- There is no employer to make pension contributions or provide life cover.
- They can be time poor.
- They are constantly battling varying January and July tax bills.
Those affected by the changing rules are typically at a point in their careers where their earnings are peaking. They are often between the ages of 45 and 55. This should be the point where they can really start to concentrate on saving a good amount into their pensions.
Like most self-employed people, the earlier years of work are about building up their business (their practice) and they may not necessarily be earning big money. They may also have other expenses that limit the amount they can save into a pension.
So, at the point they are most likely to bulk up their pension savings, they are potentially limited to contributing £10,000 per year. There is scope for potentially higher contributions with carry forward, which allows savers to make use of any annual allowance they have not used during the three previous tax years. But this will continue to reduce unless people act soon.
For example, a barrister client, aged 55, has so far saved £275,000 into his pension. His earnings have increased rapidly in recent years and he is now earning in the region of £300,000 a year.
He has a little bit of carry forward to use up this year and next year. This will enable him to contribute around £25,000 gross in each tax year. But in the 2019/2020 tax year, he will be limited to contributing £10,000 gross per year. He will not have the chance to build up his pension to a level that he can retire on.
So what should you do for affected clients? First, we look to use any remaining pension carry forward available. We then consider other tax-efficient investment vehicles such as ISAs, venture capital trusts and enterprise investments schemes, where risk tolerance allows.
But the taper rules act to discourage entrepreneurial spirit by penalising success. While some may find it hard to feel sorry for high earners, I do find it unfair.
Having the annual allowance at such a low level makes no sense, especially with a low lifetime allowance of £1.03 million also in force from April. It should be one or the other.
Ashton Chritchlow is a financial planner at Ifamax Wealth Management