My job involves a lot of writing. I mostly enjoy it enormously, but sometimes there are days when a deadline is looming and the creative juices simply refuse to flow.
I forget that there was ever a time when I wasn’t staring at a Word document littered with dozens of half-sentences, willing at least one of them to transform into a decent idea. I’m sure all writers have been there.
In the end, you have to plump for something which feels mostly coherent and hope for the best.
Sometimes I imagine it’s the same for people who have to write pension rules.
Generally speaking, the idea behind a pension rule is relatively simple. Most just become complicated when they’re fleshed out, because they have to take into account years of overlapping rules, historical issues and transitional arrangements.
Others just leave you scratching your head from the word go.
‘Thoroughly ludicrous’
Take the tapered annual allowance, for example. Reading those rules is like a dream which seems sensible at the time, but the more you think about the details after waking up, the more thoroughly ludicrous it seems.
I know what you’re thinking – at this point, criticising the tapered annual allowance is practically a hobby for people in the pension industry. We’ve spent two years (longer if you include the draft legislation stage) loving to hate it. But you really do have to wonder how and why it ever seemed like a good idea.
One would imagine that the original brief was to reduce the amount of tax relief going to the highest earners. Perhaps someone thought that simply cutting the annual allowance to a lower flat rate for high earners would be too visible and draw too much negative attention, and wanted to find a quieter way to meet the objective. Mission failed.
A sliding scale based on a person’s income may not be an entirely original idea, but its execution in the case of the tapered annual allowance makes the whole thing incredibly messy.
It’s hard to understand why no one realised that using someone’s income to set their allowance for the same tax year might cause problems. How many people know how much they expect to earn, down the pound, well before the end of a tax year?
Ignoring, of course, that it doesn’t matter how much a person expects to earn – it matters how much they do earn. And no one can know that for absolute certain in advance.
Through all the drafting and consideration stages, it seems bizarre that no one suggested using a person’s income in one year to set the allowance for the following year. I expect there could still be scenarios involving large income fluctuations which could leave someone in a tricky position, but surely it wouldn’t be a patch on the widespread problems the current system is causing?
Then there’s the fact that the two definitions of income used in the taper calculations involve pension contributions. In other words, in order to work out your annual allowance and find out how much you can contribute tax-efficiently, you first need to know how much you’re going to contribute.
Now, I know that the annual allowance does not limit how much you can actually contribute. Trust me – I’m the annoying person who steps in with a correction whenever I hear it explained as such. So perhaps this just shows that the powers-that-be think that everyone should be contributing as much as they think they need to, and that the amount of tax relief you can have or keep should be a secondary consideration.
On the other hand, we know that in practice, most people do not want to exceed their annual allowance. So why would anyone write the definitions of threshold and adjusted incomes that we ended up with? Did the definition of a high earner for this purpose even need to look at pension contributions at all?
Cynical thinking?
A cynic might say that the rules were purposely written in the most complicated way imaginable in order to put most high earners off contributing more than £10,000 even if their allowance would be higher. They might say that the backlash is just an unfortunate side effect.
Someone feeling fanciful might say the rules were written by someone suffering from some fairly serious writer’s block.
I don’t really believe that, of course. I know that’s not how it works. But it makes for a good story.
Jessica List is pension technical manager at Curtis Banks Group