Financial advisers in the UK are calling for a simplification to the tax and pension planning system as they believe reform would greatly benefit their clients.
Abrdn’s 190 adviser survey found that over a quarter (26%) want emergency tax removed from income drawdown payments, followed by removing the tapered annual allowance and the money purchase annual allowance (MPAA).
Overall, the majority of advisers (59%) said that the scrapping of emergency tax is in their top three priorities.
Abrdn said this is because single, ad-hoc payments or even initial payments of regular pension income are usually taxed on the ‘emergency month one basis’, which ignores any previous pay and tax as it charges all payments as if it was the first week or month of the financial year.
This method “ignores a client’s existing income tax position to date and uses a blanket approach which usually leads to an overpayment of income tax for most clients which they need to reclaim from HMRC”, Abdrn said.
Other advisers (39%) listed the lifetime allowance (LTA) as their most desired tax and pension planning change, while 9% wanted the MPAA gone.
A further 4% would like the removal of the tapered annual allowance to be a priority and another 4% would like to move to a flat rate of pension tax relief.
‘Biggest frustrations’
Alastair Black, head of industry change at Abrdn, said: “Complexity in legislation and tax structures causes complexity in advice. This is ultimately a barrier to good customer outcomes. Emergency tax is clearly one of advisers’ biggest frustrations, and it could be something that becomes more and more of an issue in our current economic environment with an increase in flexible payments growing likely.
“With factors like rising inflation and an increase in the number of people wanting to continue working in retirement, income needs are likely to only vary more and more, potentially meaning more instances of clients making lump-sum withdrawals or changing their regular payments. This could result in being stung by up-front tax charges – which could be up to £1,000 ($1,202, €1,177) for certain clients – that they would then have to reclaim.
“In addition, if these withdrawals are needed for specific payments, they may need to withdraw further income until they can reclaim the overpaid tax. The problems that arise from emergency tax are in large part due to it operating on a ‘month one basis’. A move to a cumulative tax basis, where tax is calculated based on overall year to date earnings would reduce the likelihood of any overpayment, or the need to reclaim.
“It’s also not surprising to see so many advisers wanting to scrap the LTA. Constant cuts to the LTA combined with various protections have added to the complexity of an already complex mechanism, and the LTA freeze will drag more pension savers into the LTA net.
“Despite this, pension saving will still be the most tax-efficient place to save for the vast majority, and the LTA shouldn’t be seen as a ceiling – if net returns on savings in excess of the allowance are still greater than saving elsewhere, then some extra tax could be a price worth paying.”
