The Government has announced its plans for closing the 24bn tax loophole on uncapped drawdown and as I thought, they came up with some more out of the box thinking to come up with a system that:
- allows contributions to continue while people phase from work to retirement
- doesn’t introduce lock-in or waiting periods
- keeps up the promise to do away with capped drawdown.
They’ve done this by reducing the Annual Allowance to £10,000 when you access more than your maximum tax-free cash sum.
So, does this work? I’m looking for something that is simple to explain, easy to administer, and is an obvious solution.
It’s kind of simple to explain. It also has some useful rules for those already in drawdown on 5 April 2015. A) those in capped drawdown can keep Annual Allowance at £40,000 provided they don’t exceed their capped income. B) those in flexible drawdown who currently have nil Annual Allowance will see it increase to £10,000.
It’s probably easy to administer from the pension scheme side as its generally up to individual’s to be responsible for their own tax above the Annual Allowance. I’d like to know whether the impact on “scheme pays” rules has been considered, and presumably contribution certificates will be needed for anyone drawing down who pays in more than £10,000.
is it an obvious solution? Well, apparently 98% of savers won’t be affected (as they pay less than £10,000 after accessing benefits anyway) which is paraded as a good thing, but is this masking a big problem? Another way of phrasing it would be that 98% of savers will be able to use the loophole. Perhaps that is ok with the Government (salary sacrifice is some form of scheme to reduce NI after all and this loophole is an extension of that).
The Government have said that they will keep it under review. The danger is that the number of people wanting to pay more than £10,000 after accessing benefits may increase dramatically after April 2015 and so you can’t project the impact by looking at pension contribution habits under the old regime.
This rule looks like a green light for those “retirees” who can afford it to pay £10,000 in every year and draw it out again. So it looks simple and easy and a neat solution, but actually I am not sure they have cracked it. And if that means a revision to these rules in 2017, say, then better to get it right now and think again.
Perhaps having a fixed cap of 10 per cent for drawdown if you want to keep contributing works better.