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Budget 2013: Malcolm McLean’s 10-point plan for pensions


George Osborne has not shied away from significant pension tinkering since becoming chancellor in 2010.

Ahead of Osborne’s fourth Budget speech on March 20, Barnett Waddingham consultant Malcolm McLean delivers his 10-point plan to boost UK saving.

1. Allow interest on savings to be paid tax-free (up to a limit) to individuals after state pension age

Many pensioners rely on the interest on their savings to supplement their pensions during retirement and often complain about having to pay tax on this necessary part of their income particularly when, as now, interest rates are very low.

As the savings have in most instances been built up from deposits made from already taxed income it seems appropriate to allow these monies to be free of further tax, where the income levels are relatively modest.

2. Allow pensioners to build up any extra qualifying years needed for state pension purposes from earnings after state pension age

It has been suggested there is no good reason why pensioners in work and earning in excess of the primary threshold (currently £7,592 a year) should not pay some NI on their earnings like everyone else.

At the present time NI contributions cease automatically for that individual when they reach state pension age regardless of whether they are continuing in work and regardless of their level of earnings.

If such a change were to be made we would argue that contributions made after state pension age should be accounted for in the normal way to enable pensioners to accrue any further NI qualifying years necessary to make good a shortfall in the 30/35 years required to qualify for the full state pension.

3. Confirm no further review of pension annual and lifetime allowances for the duration of this and the next parliament (i.e. until 2020 at the earliest)

There has been a series of cost-cutting measures to pension tax allowances already and we desperately now need a period of stability to restore confidence in the system.

Further reductions in the annual allowance would also be very damaging to middle income savers, especially those in final salary schemes who could be hit with some fairly hefty annual tax charges.

Moreover, a lower annual allowance would reduce flexibility and could inhibit older people from paying sometimes very necessary lump sums into their pension plans in the run-up to retirement.

4. Continue to permit contributions into tax-approved pension plans to attract relief at the contributor’s highest personal tax rate and for a tax-free payment to be made as a pension commencement lump sum

Tax relief on pension contributions has always been given at the contributor’s marginal tax rate with tax levied on the same basis when the resulting pension is put into payment.

Although there is an argument in favour of increasing the level of the relief for lower earners (i.e. standard rate tax payers) to encourage greater saving, this should not be at the expense of higher rate payers, many of whom would not see the point of continuing to contribute into a pension scheme with lower relief whilst still paying tax on the pension at the higher level.

Such a change would also create greater administrative complexity for plan sponsors running occupational schemes.

The right to take part of a pension in the form of tax free cash is generally welcomed by those needing to pay off debts, clear outstanding mortgages etc. as they enter retirement. Employers also often appreciate this as it reduces the ongoing pension liability they have to finance.

5. Remove the transfer ban and contribution limit from Nest at an early stage

The current restrictions on Nest do not appear to be in the best interests of either employers or the pension consumer.

The contribution cap prevents all individuals from making higher payments into the scheme when they might be in a position to do so. Also those employers with higher earners may not wish to run more than one workplace pension scheme and consequently may reject Nest as an option. This could put Nest at a disadvantage with its competitors and lead to a reduction in choice for employers and potentially poorer value for employees.

The ban on transfers into or out of Nest is similarly over-restrictive and will have to be reviewed in any event to give effect to the Government’s “pot follows member” policy designed to facilitate the consolidation of small pots.

6. Further simplify the new single-tier state pension by “buying-out” any excess over the £144 per week flat rate

The concept of a simple flat-rate state pension is one that commands wide support. And yet in many cases because of past accrued rights to Serps, the pension payable will be higher and will accordingly neither be flat-rate nor simple to understand and/or administer.

Buying-out the excess by means of a taxable lump sum would be cost-neutral and could even produce cost savings for the Exchequer if the commutation rate was in line with that typically used for the purpose with other public sector pension schemes (e.g. a ratio of 12:1 where £1 pa of pension is exchanged for a £12 cash lump sum).

It is likely that the prospect of receiving part of their state pension in cash would be welcomed by the pensioners affected, bearing in mind that the option to delay claiming their state pension and taking a lump sum in lieu will no longer be possible once the new arrangements are in force.

7. As an alternative to means-testing, consider consolidating the value of the current universal winter fuel payment, free bus travel and free TV licences within the state pension

There seems to be a move afoot to withdraw or substantially curtail the present range of universal benefits paid to pensioners.

The Prime Minister has confirmed that the undertaking he gave to preserve these during the last election campaign was for one parliament only and others have argued that at a time of economic stringency “rich” pensioners really cannot expect to continue to receive these types of universal benefits indefinitely.

This is essentially a political decision which is for the Government to make. The principle of universality is one that many hold dear for all age groups although the break has been made with child benefit for higher earners and the Government may decide there is no over-riding reason – other than a political one – why pensioners should have special treatment in that respect.

It would be possible to means-test these benefits by introducing an income cut-off point, but it would be very intrusive as well as costly to administer if details of every pensioner household had to be obtained and examined/checked. Moreover, the current trend is to move away from means-testing whenever possible.

The alternative of linking entitlement to those receiving pension credit is probably too simplistic and certainly unfair to others with incomes only marginally above the guarantee minimum income level – likely to be more numerous when the new single-tier state pension is introduced in 2017 at that sort of level.

The possibility of converting these benefits initially at the same overall cost (with an assumed average usage cost for travel) within the state pension has much to commend it, operationally speaking at least. This would have the effect of increasing the weekly pension for both the basic rate (which will continue for existing pensioners) and the new single tier rate by up to about £10 but would enable at least a reasonable proportion of the money to be clawed back through income tax – for the wealthiest pensioners at the higher tax rates.

A matching increase would also probably have to be given to the pension credit guaranteed income figure to ensure the poorest pensioners did not lose out. Under this scenario, of course, entitlement would not normally exist until state pension age in contrast to the present arrangement where some of the benefits have been payable from the much younger age of 60. From the Government’s point of view, this would reduce costs substantially going forward.

Obviously there would need to be transitional arrangements for existing recipients of the benefits who are still under state pension age if and when the change is brought in – they would stay under the old system until they reached the requisite age for claiming their state pension – but eventually all the current pensioner universal benefits would cease to exist and be replaced by the more generous state pension.

8. Provide extra tax relief to employers with defined benefit pension schemes who face increased national insurance (NI) costs from the abolition of contracting-out

The end of contracting-out on a salary-related basis in 2017 could have significant cost consequences for employers, particularly those with large workforces.

For a typical worker earning the average salary of £25,000 the employer will have to stump up an extra £657 a year. It is anticipated that some private sector employers will want to claw back the extra money they have to find by raising employee contributions further or reducing benefits, but there will also be the possibility of many throwing in the towel and closing their defined benefit schemes altogether.

The Government is urged to support corporate sponsors through this difficult period by offsetting at least some of the extra NI costs against tax.

9. Prepare to remove all regulatory restrictions on risk sharing arrangements in occupational pension schemes to facilitate the introduction and development of new “defined ambition” type schemes

The Government has already acknowledged the desirability of having more risk sharing arrangements as a middle way between the polarised extremes of defined benefit and defined contribution pension schemes.

As the auto-enrolment project moves forward, legislation must be changed to allow a greater range of risk sharing arrangements. The closure of defined benefit schemes in the private sector in preference for sometimes less valuable (to the member) defined contribution schemes is also continuing apace.

This trend could be arrested by allowing employers to implement risk-sharing schemes.

10. Confirmation of a longer term plan for the full merger of NI with tax

The plan should set out how and when such a merger of the two systems can be achieved. If it were possible to eliminate NI altogether then there would appear to be scope for massive savings at all levels in manpower and other administrative services alone.

For state pension purposes going forward a specified minimum amount of this composite tax paid per year would be used instead of NI as a required qualifying year. A similar arrangement would apply for other contributory social security benefits.

Malcolm McLean is a consultant at Barnett Waddingham


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Removing uncertainty is certainly a laudable aim. Increasing complexity is not.

    People respond to incentives, both positive and negative.

    I don’t think that a higher or additional rate taxpayer who will remain so in retirement will need any further disincentive to save into a pension than the wealth destroying premise of basic rate relief only on entry into a pension.

    I would be loth to see additonal support given to private sector employers that insist on maintaining a DB scheme at the taxpayer’s expemse. I would have hoped that FRS17 would have laid bare the true cost of such indulgence. It would be more beneficial if Public sector DB schemes adopted GAAP and dropped such fanciful notions of long term GDP growth of 2.5%.

  2. More interference less benefits.
    For once I am speechless.

  3. Can’t help wondering how the Exchequer’s “no pension tax relief on the way in, no pension tax on the way out” sums would look, cost-wise and cash-flow wise.

  4. Julian Stevens 6th March 2013 at 3:18 pm

    This is all very intellectual and technical stuff, but misses completely the need for simplification and the restoration of the things taken away with the advent of stakeholder.

    Restore Contributions Insurance.

    Restore Pension Term Insurance (subject to a minimum level of ongoing contributions to retirement benefits).

    Restore the dividend tax reclaim.

    Scrap the punitive death tax on unspent funds post-retirement (and allow said funds to pass down into PP’s for the next generation).

    Scrap the LTA.

    Simplify the Annual Input Allowance to 30% of earnings with one year’s carry-forward.

    Scrap the Annuity Rates Trap (and replace it with a Retirement Income Bond).

    Then again, why bother? It’s probably too late anyway.

  5. One big problem is that the self employed person and younger savers will not be able to access advice as they are generally only able to save on a regular basis, they do not have large lump sums to Invest. RDR has ruined the regular premium market because A. No one wants to or can afford to pay £500-£600 up front to set up a pension and B.They wont go on-line and do it as pensions are complex and they actually want advice. C. No adviser is going to travel, give advice and trawl through all the hours of fact finds, suitability letters ect ect to earn say £50.00 each month for six or 12 months.
    We had a similer situation with stakeholder and pension sales plummeted. The FSA and this government have to wake up, the only way the young starter or the self employed will be able to access regular premium pension advice is if commission is restored to regular premium business or they allow factoring.

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