Apfa: The dangers of a radical pension tax relief overhaul

Summer saw a flurry of FCA papers on everything from capital adequacy requirements to smarter consumer communications and, of course, the announcement of a Financial Advice Market Review. There is plenty going on in terms of regulatory developments.

However, it would be a mistake for advisers to take their eye off the pension reform ball too quickly. New pensions minister Ros Altmann, the return of Parliament from summer recess and the fact meaningful statistics around the pension reforms are beginning to be produced have combined to focus policymaker scrutiny once more on retirement saving.

One of the first orders of Parliamentary business was a Work and Pensions select committee inquiry into pension freedoms advice and guidance, at which Apfa director general Chris Hannant gave evidence. He cited numbers that suggested about 150,000 new queries linked to the pension freedoms had been received by advisers.

We do not yet know how many of these have translated into concrete new business but, so far, fears Pension Wise may be a competitor to advisers seem relatively unfounded. What is perhaps more concerning for advisers are rumours of further expansion of the Pension Wise remit. The Government would be unwise to spend further money duplicating what is already out there in terms of the Money Advice Service and the advice market.

There have also been a number of stakeholder meetings with the DWP and others on pension communications, and advisers can expect an upsurge in advertising in the autumn, which may also have an effect on enquiries from new and existing clients regarding their retirement options.

Earlier this month, the Chancellor’s consultation on pension tax relief closed. One specific proposal Osborne has examined is to make pensions more like “saving into an Isa” with people taxed on their contributions instead of on their withdrawal. This is a particularly dangerous proposal as it is asking people to trust the Government to deliver promised tax relief many years in the future. This would seriously undermine the incentives to save for the long term.

In the consultation paper, the Government stated its desire to simplify the current system to encourage consumers to engage with their pensions. However, investors have already gone through significant upheaval to the pensions policy landscape. What they – and the industry – need is some time to absorb the full consequences of previous reforms.

Tax relief

Although we are all aware that increased longevity, a shift away from defined benefit to defined contribution pension schemes and historically low levels of private pension savings have serious implications, removing tax relief altogether would not help prevent a pension crisis. People understand the current pensions approach and any further Government changes would be counter-productive in this respect.

Maintaining the principal of being taxed once upon withdrawal also sends a clear signal to consumers that pension saving is desirable and more directly compensates people for the fact access to their savings has been deferred until a later date.

Instead, there should be other methods to raise awareness among people that the current 8 per cent contribution rate is insufficient as well as ensuring a more sustainable pension system in the long run. Auto-indexation to increase contributions with pay increases and explaining why saving more is necessary to provide for their old age could be possibilities.

While tempting to focus all resources on the Financial Advice Market Review, I would strongly urge advisers to use their expertise and understanding of human behaviour on personal finance issues to keep making the case to Government for a pension system that benefits consumers and advisers alike.

Caroline Escott is senior policy adviser at Apfa