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"In the back of the cab"

04 February 2016

David Lane, Partner and Business Development Technical Director

Stuck in traffic last week my mind began to wander and, without wanting to add any more doom and gloom to what has been a pretty miserable start to the year, I am beginning to worry about how people are expected to meaningfully save and plan for their retirement when the job of doing so is becoming increasingly harder. The current situation reminds me of being in a room where the floor and ceiling as well as all four walls are closing in and there is nowhere to hide. The squeeze is on and if we are not careful what is already a bad situation may just get worse. Let me make my case.

Many moons ago, one Jean-Baptiste Colbert, the George Osborne of his day to King Louis XIV, made the observation that "the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing". Quite so. No Chancellor in their right mind (and particularly one with an eye on being PM) is going to pluck any feathers, by say raising the headline rate of income tax and causing a huge amount of unwanted and politically damaging hissing. A problem thus ensues as the Chancellor seeks to manage the budget deficit by a combination of cutting government expenditure and raising taxes. But from where and without too much hissing? You guessed it - pensions!

As an investor looking to put money away for what I hope will be a long and happy retirement, I am faced with a maze of rules as to how much I can contribute. There is the standard annual allowance of £40,000, the carry forward rules for any unused annual allowance, the "reduced" money purchase annual allowance, the "alternative" defined benefit annual allowance, and from the 6th April the "tapered" annual allowance which will potentially further restrict the amounts that can be paid into pensions. All are based on hugely complex rules, accompanied by equally impenetrable anti-avoidance legislation. OK, there is a good case for capping the cost of tax relief to the exchequer (and the taxpayer) but should there be such opaqueness and complexity? We will hear more about this in the upcoming March budget.

However, that is not the whole picture. If I manage to build up a reasonable size fund which will get progressively harder for the reasons above, and (as I hope) my fund does well, I then have to face another potential tax charge, this time in the guise of the Lifetime Allowance Charge (LAC) of 55% on any part of my fund in excess of £1million. This still sounds like a big number, but in fact a reasonable final salary entitlement and other pension savings could easily tip someone over the threshold. The LAC now seems to be affecting not just the "fat cats" but is coming further down the income scale. Should this be the direction of policy? Is it right to be taxing and capping pension pots on the way out as well as restricting what can be contributed on the way in? Cake and eat it comes to mind.

But there is more. For entrepreneurs and business owners, people who have built up prosperous and successful enterprises, the ability to extract profits and make payments into their pension was a tax efficient and sensible planning decision. The ability to do this in any meaningful sense will be taken away, thereby reducing the opportunity to build a meaningful pension pot for retirement. Add to this the changes to the taxation treatment of rental income for buy-to-let investors, many of whom invest in property to supplement their retirement income, then to these eyes there seems to be a whole of lot of plucking going on but where is the hissing? Pensions seem to be the fiscal well that never stops giving. One day it may very well run dry and then what?