Wealthy retirement savers don’t understand how much they can pay into their pensions each year because the rules are too confusing, claims a finance expert.
Former pensions minister Steve Webb argues HM Revenue & Customs wrongly assumes taxpayers understand the rules so does nothing to make them easier to digest.
The rules in question relate to the annual allowance – the amount someone can pay into pensions in any tax year.
The annual allowance depends on how much a retirement saver earns.
For people earning less than £150,000 a year, the annual allowance is £40,000 and if the saver sets aside more than this, the scheme administrators trigger an alert. The figures are then carried over to the saver’s tax return for an adjustment for the overpayment.
No warnings for high earners
But anyone earning more than £150,000 does not receive a warning from their scheme trustees.
The risk is they have a tapered annual allowance that could be as low as £10,000, but no one knows if the taper applies until towards the end of a tax year.
Webb argues that someone could have a tapered allowance allowing them to make tax-relieved contributions of £25,000 year, but be unaware of the cap and may have paid £30,000 into their pension.
Webb wrote to HMRC to ask how retirement savers were expected to give the right information on their tax return if they were not told about their tax status by their pension administrators.
HMRC replied that only a small number of people paid more than £40,000 into a pension and the duty was on them to make accurate declarations on their tax return.
HMRC in parallel universe
“HMRC clearly live in a parallel universe where taxpayers perfectly understand the tapered annual allowance and the way that direct benefit pension accruals are tested against it. A system designed for a world where everyone faces the same £40,000 annual allowance simply does not work in a world where different people have different annual allowances,” said Webb.
“Taxpayers are left to their own devices. When filling in a tax return they need to work out their own unique annual allowance – assuming they know that the tapered annual allowance exists – and then get information from their pension scheme to see if they have exceeded their personal annual allowance.
“I suspect many thousands have entered a zero on their tax return for the question about exceeding the annual allowance and may be in for a nasty shock months or years later.”