“It is questionable whether an age-linked system of pension tax relief would really create a more effective, better-targeted incentive to save. In principle the proposals make sense, but in practice they would need to be tested extensively to ensure they achieved the desired impact.
“Were these proposals taken forward it would see the UK commit to a social experiment on a grand scale, with the results only becoming apparent decades into the future when today’s younger savers are headed toward retirement.
“Despite the generous relief available on pension contributions today, many people aren’t fully aware that system of incentives exists. By itself, simply changing that system is not going to make any difference to the way those people think about long-term saving.
“There are a lot of people that choose to boost their pension contributions when they inherit money, sell a business or simply start earning more in salary and bonuses when they’re older. While they miss out on decades of investment growth by doing so, those people that planned to save later in their working lives would be punished by an age-linked system.
“And we should not under-estimate the risk that further reform to the pension system may leave people disengaged. It takes time to adapt to change. Consumers are still getting to grips with auto-enrolment and pension freedom reforms, which radically alter the way we accumulate and decumulate savings respectively. Another change to the system might just leave people more confused.”
“The annual allowance taper is extremely complicated. Looking ahead to next month’s Autumn Statement the new Chancellor should consider whether it is really worth persevering with.
“Philip Hammond is in a position to backtrack on the annual allowance taper and attribute it to an error from his predecessor, George Osborne. The OBR paper published yesterday gives him ample justification to do so.
“The taper looks like a measure designed by policymakers working with a spreadsheet to find some extra tax revenue, but with limited or zero sympathy for practical application in the real-world.
“For example, many people, particularly the self-employed, will not know how much their adjusted income will be until after the start of the next tax year. For others, receipt of a bonus at the end of the year, or a taxable redundancy payment, could give an unexpected boost to their adjusted income that could result in them becoming subject to an annual allowance tax charge.
“The policy is also particularly complicated for defined benefit scheme members. Many will end up exceeding their annual allowance. While in some cases the charge will be met by the employer via a reduction in their pension entitlement, some will not have this option and the tax liability will have to be met directly by the individual from their own resources.”