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Brace for impact: Tax relief reform and pension freedoms failures loom large

The next 12 months should have been the high water mark for the pensions industry. In theory, the revolutionary changes introduced in April 2015 will have been bedded in, while from 2016 the new state pension is set to drastically simplify retirement planning.

But what began as small grits in the oyster of the Government’s liberalisation programme have turned into painful sores. Savers are still struggling to access their pots while scammers are enjoying easy pickings from over-55s’ cash windfalls. And a once-in-a-generation consultation on the pension tax relief system has stalled product innovation as providers face another fundamental market shift.

The regulator’s capital adequacy regime for Sipp providers will also finally take effect in September. It seems certain some providers will exit the market or drastically cut back the assets they permit, with the impact on charges unknown.

Bumpy landing

Consumers have been blocked from using the freedoms by hurried rules that have led to providers restricting pension transfers. In addition, trust-based schemes and closed-book providers have been reluctant to upgrade systems to cater for the new flexibilities.

At the same time scammers who previously focused on “liberating” pension funds before normal retirement ages have been handed a golden opportunity.

Now funds can be accessed legally from the age of 55, savers are being lured into high-risk, unregulated investments without the protection of providers or trustees.

Figures from the City of London police show £9.1m-worth of scams were reported between April and August 2015, up from £4.5m in 2014.

Standard Life head of pensions strategy Jamie Jenkins says: “There’s been a switch of emphasis of scams from liberating money pre-55 to enticing people into investment scams post-55. The enigma is we don’t really know the extent to which that’s happened, much will have happened beyond the realm of providers to do anything about it. My concern is there’s a problem bubbling under the surface before people realise they’ve lost their money.”

If the Government does not halt the stream of money being taken out of the system and into the pockets of scammers, the freedom policy in its current form will be under threat.

On ice

While the Government is making progress working through the unintended consequences of the reforms – such as how to value guaranteed annuity rates – the future of tax relief looms large over the industry.

Whether the Treasury opts for a switch to the taxed-exempt-exempt model and Isa-style pensions or – the industry favourite – flat-rate of up front relief, the impact of any change will be enormous.

Providers fear the end of upfront relief will see pension saving plummet as well as requiring a costly dual system to deal with savings caught under the old model.

Initially disregarded by many commentators as a dangerous crackpot idea, the Government has shown no signs of ruling out a switch to TEE.

Cicero executive chairman Iain Anderson says: “The chances of Jeremy Corbyn ending up in Downing Street are very slim, but what he is doing is pushing the Chancellor and he has responded with some quite consumerist approaches to policy which can be quite challenging for the sector.

“And part of the reason why they are considering the switch to TEE is that you can wrap that up in the same sentiments.”

The Labour party’s response to the freedoms has been muted at best and negligent at worse. However, a report commissioned by Rachel Reeves, due to be published in the first quarter of 2016 by the Pensions Institute, is likely to set a more combative stance on the reforms and pensions policy more broadly.

Automatic enrolment

While tax relief reform will inevitably dominate headlines in 2016, the success or failure of the Government’s flagship automatic enrolment policy hinges on how small employers react to the reforms.

Major providers, including Now: Pensions and The People’s Pension, will introduce employer charges this year to pay for improved services for small firms.

Now: Pensions director of policy Adrian Boulding says early signs suggest small businesses will engage with auto-enrolment.

He says: “Auto-enrolment will stand or fall on whether small emp-loyers support the policy. The experience to date suggests small firms are supportive and are encouraging their staff to put some money away to pay for their retirement. Employer attitude is critical and we will have to wait and see how that pans out as the reforms are extended.”

Boulding also expects debate around the scope of the reforms to heat up this year, with about five million people, including the self-employed and low earners, so far excluded from auto-enrolment.

He says: “I expect debate will bubble beneath the surface this year ahead of the auto-enrolment review in 2017/18.”

Death of the Sipp

Capital adequacy rules based on assets under administration and the proportion of standard and non-standard assets held by Sipp providers will finally be in force in September.

The regulator seems unlikely to issue any more guidance, leaving providers to argue over how key assets such as commercial property should be classified.

AJ Bell head of technical resources Gareth James says: “The practical impact of the rules is likely to raise its own questions. Can we expect some providers to increase charges to cope or will any firms restrict investment to the FCA’s standard asset list to manage the financial requirement?”

He also warns the potential for inconsistency of reporting may not lead to the greater consumer protection the FCA wants.

What is more certain is the inc-reased costs of compliance will lead some providers to sell up or close to new business. In addition, as firms shun more esoteric investments, the appeal of investing in a Sipp may rapidly fade.

In the firing line

Advisers will also have to deal with a deluge of new rules this year. Although likely to eventually be swept away by tax relief reform, the annual allowance taper for people earning over £150,000 hits in April.

In addition the Government’s plans to develop a secondary annuities market continue apace, with confirmation consumers will be required to take advice before selling though the threshold has yet to be set.

The unrelenting pace of regulatory change and continued use of pensions as a political plaything will inevitably lead to renewed calls for a permanent independent pensions commission.

Logically creating a body to take the politics out of pensions seems sensible. However, the chances of politicians signing away their right to dip into a lucrative honey pot are slim. More importantly, stripping elected representatives of their power in favour of an unelected commission will be difficult to justify.

Expert view

The political rolling stone that won’t gather moss

Each Parliament seems to have a new “pensions settlement” but the last one was a total land grab for the Chancellor. Budget 2014 proved a game changer for George Osborne personally and politically. So why let the dust settle, especially with the media continuing to show voters trapped in old pension plans.

Ideas for scrapping higher rate relief have abounded since Labour’s time in office. It might have made some real political sense for them but the 1997 raid on pension funds as the first act of Gordon Brown hit him hard. Maintaining higher rate relief was a better pill to swallow than scrapping compulsory annuitisation.

This Chancellor’s political calculus is to continue to roll. That is why he set in train the pensions review in his first Tory-only Budget last year. Ideas and papers which he had considered back in 2008 and 2009 while in opposition – like TEE – are back on the table.

Freedom and choice are very difficult arguments to repel – and so it proved for Labour in the election. A Jeremy Corbyn-led Labour party will mount the arguments for pensions for the common good – but there is little political traction right now. And let us not forget a new retirement savings settlement is also likely to be a multi-billion- pound bonanza for the public finances. Freedom and choice and an improved public balance sheet – politically what’s not to like?

Whether its set to be flat-rate relief around 30 per cent for all savers or TEE, one thing is clear – in March the status quo is not an option anymore.

Iain Anderson is executive chairman of Cicero

Adviser views

Claire Walsh, chartered financial planner, Aspect8

Pension tax relief reform, which now seems inevitable, will be revolutionary and is likely to shape the debate for 2016. Ultimately the Government needs to encourage people to save and the idea of creating a two-for-one incentive looks attractive from an engagement point of view. The lifetime allowance should also be looked at and potentially scrapped because it is complex to administer and punishes people who are trying to do the right thing.



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There are 11 comments at the moment, we would love to hear your opinion too.

  1. Woe, woe, all is woe. Anyone reading this article will get the impression that absolutely everything is terrible and that thousands of people haven’t benefited from the new pension freedoms, especially those who can afford to make a large one-off withdrawal without impoverishing themselves or want to pass their savings onto their children.

    The figure for scams being reported in 2015 is irrelevant because most of these will be 3-5 years old, whose investors are just starting to wake up to the fact that they have been sold a pup. Pre pension freedoms in other words. As far as anecdotal evidence goes, the number of threads I’ve seen on personal investment forums going “I’ve been cold called and told I should liberate my pension and invest it in Glaswegian car parking spaces, should I do it” has dropped from one every few weeks to virtually zero.

  2. At what point do we actually ask people the following set of questions.

    1 Given that you were approached out of the blue by a company you never heard of and who you never met face to face, did you not consider it might be a bit dodgy?
    2 At what point did you forget that dealing with a company via a PO Box, without knowing their address or having landline telephone numbers might be a scam?
    3 When did you switch your brain off to not even consider that taking all your money out of your pension fund and investing it in an investment scheme that you couldn’t understand could be very risky?

    Just when do people have to face up to their own responsibility?

    Ian Coley
    Medical Investment & Advisory Services LLP

    • Sadly Ian in answer to your final question, the way society is currently construed never and that suits the bureaucratic class down to the ground. Classic tyrannical tactic use of fear to corral the sheeple into giving up their responsibility and freedom for some sense of security (often false) under the tyrant’s wing.

  3. Ian – hear, hear!
    It’s because many people say that they don’t want to pay a fee – so these “free” services must be better.

  4. Michael Sturgess 8th January 2016 at 11:21 am

    I’m always intrigued when a bandwagon gets rolling – this time, it’s the familiar one concerning the further curtailing of tax relief on pension contributions, perhaps restricting relief to the basic rate only, or to some other in-between level (say 30%). Of course, either option could happen though the mechanics of operating such a restriction, whilst not insurmountable, would be complex and involved and would almost certainly have unintended consequences. In a restricted relief world, employer pension contributions (or a part thereof, depending on how close the employee is to paying 40% tax) presumably become potentially taxable – a nightmare to police, administer and communicate. This does not mean that it cannot happen since many of the pension changes over the past 5 years have been a nightmare to police, administer and communicate.

    Of course, the simplest option would be for the Chancellor to deny relief altogether on pension contributions, retaining only the exemption from a benefit in kind charge on employer contributions. This would be easier to administer but would shut down swathes of the pensions industry overnight so this option is (probably) not on the cards. I haven’t even bothered to consider the consequences for final salary schemes (both funded and unfunded), were the government to proceed with the option of restricting reliefs. Again, there would presumably be a potential income tax charge on the member, based on the notional contribution. Again, horrific to administer.

    My (evidently contrary) view, for what it is worth, is that having already curtailed reliefs substantially by reducing the lifetime allowance and by restricting the annual allowance for high earners from April 2016, it is more likely, on balance, that the Chancellor will shy away from tinkering with the actual rate of relief provided. He could introduce other measures – much more likely – such as cutting the annual allowance further from £40K to, say, £30K and restrict the ability to carry forward unused annual allowance from 3 years to 1 year.

    There are those who apparently have the ear of the Treasury who are convinced that the days of higher rate relief are numbered. They may be right. If they are proved right on March 15th, the pensions industry, and pension advisors, have an existential crisis ahead. I will stick my neck out and say that I believe they will be proved wrong.

  5. Christine Brightwell 8th January 2016 at 1:48 pm

    And all this after the “simplification” of pensions. Oh dear….

    I recall commenting to the pension minister c 3 years ago that “liberation” or good old fashioned theft of pension funds would be a really big problem going forward. He just looked at me as if I were a nitwit.

    If we don’t stop messing with the tax issues we will need a new simplification regime – what a joy that will be.


  6. Calm down dear…

  7. Brace for Impact eh? So, the great ship “Pensions” is about to hit an iceberg……

  8. Nicholas Holdcroft 8th January 2016 at 3:29 pm

    @ Stuart …. ‘Sheeple’. I love it 🙂

  9. The idea of removing tax relief on contributions to a registered pension plan/scheme is, IMHO, a terrible one. Virtually everyone contemplating contributions to anything outside/over and above an employer sponsored scheme (all the self employed for a start) will choose an ISA instead and, having done so, will probably withdraw some or all of it long before they retire. Who would choose a scheme that works like an ISA except that they won’t be permitted to access their fund until at least the age of 55?

    Tax relief on contributions is a big and valuable attraction of a pension plan. If it’s withdrawn, so too will be the incentive to pay into one. On its own, the idea of If you don’t, you’ll be a pauper in retirement just isn’t enough.

    Also, all existing plans geared to tax-relieved contributions may have to be closed to further input ~ otherwise, how will the fund be split between the element of which 75% must be applied to secure a taxable income and the element that’ll be free of tax on all withdrawals?

    If the government wants to curb the cost of granting full tax relief to HRT payers, then just cut the top rate to 30%. A flat rate of 30% for all, even for BRT payers, will never fly ~ it’d cost the exchequer millions that it simply doesn’t have to spare.

  10. Orrible Osborne has done his utmost to dismantle private pensions. Indeed who needs Corbyn when we have him? Lifetime allowance, Limits on contributions, Auto Enrolment, Pension ‘Freedom’ (so called), Annuity encashment and now the mooted withdrawal of tax relief.

    It really is pensions RIP. And what will be the outcome? More people investing in property? That will scotch housing availability for first timers and the less well off. That is probably part of the reason for the new BTL rules – to make them less attractive. So will money now flow down the plugholes of flaky VCT and EIS schemes. (Void Capital Totally and Every Investment Sinks)?

    Savings culture? Where has that gone? How long before he taxes ISAs? Income and gains – or limits the total or puts some other limitation?

    Household debt is now 168% of GDP, is this going to rise? Personal financial policy from NO.11 seems to be aimed at ever more debt and more and more spending in the shops. Is this really a way to run an economy?

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