At the moment the talk of the pensions world is the complex tapered annual allowance which can leave higher earners with hefty tax bills.
The debate over whether the taper should be reviewed has been all over the press with doctors lobbying against government to scrap the taper after cracks began to appear in this policy.
Introduced in 2016, the tapered annual allowance gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.
The taper means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.
Sir Steve Webb, former pensions minister and director of policy at Royal London said: “The tapered annual allowance has to be one of the most complex parts of the pension tax relief system. It is fundamentally flawed in a number of respects.
“There is a ‘cliff edge’ effect where someone a pound below a threshold is unaffected but someone a pound above can face a bill running into thousands.”
Although doctors’ voices are the main driver in this debate, with teachers, the military and other public sector workers also fighting against this cause, individuals are just as likely to be affected, especially Generation Xers.
This is a generation of people born between the mid-1960s and the early-1980s who are now starting to think about how much they have saved in their pension pot and whether they need to start making higher contributions.
However, some Generation Xers aren’t saving as much as they want to into their pot to avoid the tapered allowance, according to Tina Winter, financial planner at Balance Wealth Planning.
Ms Winter said: “I would say that those affected are definitely not contributing as much as they would want to pensions – mainly in their 40s and early 50s.
These people are now in their prime earning years, and in the past this would be the time of their working lives when they would have been able to really ramp up their pension contributions after years of working to very tight household budgets and therefore not able to save much.
“I’ve no doubt that when they want to retire, they will be much worse off in pension terms than current and recent retirees.”
Although the tapered annual allowance is earnings related rather than age related, Generation Xers are often in the prime of their careers and have hit their earnings peak, therefore making them more susceptible of entering over £110,000 and entering dangerous territory, in regards to high tax charges.
Jonathan Halberda, senior financial consultant with advice firm Wesleyan said: “The issue isn’t mainly about age but the amount a person earns. However, if we look at age then clearly millennials have more time to plan and really think about the most effective way to achieve their retirement goals.”
More Generation Xers are now turning to advisers for help navigating this complicated allowance while others choose to opt out of contributing or only make partial contributions.
This is a trend that Rachael Hall, independent financial adviser at Circle Financial Services, has noticed recently.
Ms Hall said: “Before the taper was introduced the majority of clients seeking annual allowance advice would be in the over age 50 categories, but since 2016/17 we have seen a remarkable impact on those aged 40 plus, many whom have no carry forward allowance left and will be subject to annual allowance charges from now until retirement (26 plus years).”
She added: “In comparison Baby Boomers still have the benefits available under the older pension schemes, and millennials should have more time to ride out the changes.”
Mr Halberda said: “It would be wise for Generation X to seek financial advice as this is a hugely complicated issue and if someone makes the wrong decision there could be huge implications further down the line that are difficult to reverse.”
Advisers have also noticed that many Generation Xers are turning their backs on pensions instead opting for other investment strategies which come without the worry of the taper.
Ms Winter said: “Clients are adopting a range of alternative investment strategies as an alternative to pensions - buy to let properties are popular, and we are seeing clients putting money into ISAs and offshore bonds as relatively tax efficient investment wrappers in being able to provide a tax efficient income later, but without the benefit of tax relief now.”
There are limited opportunities outside pensions for investing with immediate income tax relief and often those types of investment are higher risk and outside the mainstream.
She added: “Property downsizing is also often mentioned by clients as something that they will do at some time in the future to release capital, but I’d never recommend that anyone rely on that as a retirement strategy.”
Ms Hall agreed that if the taper is kept then pensions will soon become increasingly unpopular.
Ms Hall said: “If things continue as they are it’s inevitable that we will see future retirement portfolios made up from a combination of pension, ISAs, and other investments, such as rental income.”
The government is working to avoid this outcome and on August 7 HM Treasury announced that it will review the impact of the taper.
This was part of a further consultation on the rules of the NHS Pension Scheme, which will soon be published.
Sir Steve said: “There are simpler ways of reducing the amount of tax relief enjoyed by high earners."
“Abolishing the tapered annual allowance and recovering the lost revenue through a modest across-the-board reduction in the annual allowance would be a much simpler and more predictable system.”
Amy Austin, Senior Reporter at FTAdviser