Shifting to an Isa model for defined benefit pensions would not create the “operational paralysis” some providers fear, according to think-tank the Centre for Policy Studies.
In a new report research fellow Michael Johnson suggests how different components of DB schemes could work within a taxed-exempt-exempt model.
Johnson has been leading the calls for the current pension tax relief system to be scrapped in favour of an Isa model with tax free income.
The Government would save billions in upfront costs, but critics have argued applying the idea to DB schemes would be fraught with complexity.
Johnson suggests a one-off reduction in accrued right before ‘D Day’ accompanied by a matching charge to DB funds.
He says: “This would avoid the operational complexity of two tax frameworks co-existing for decades to come, and would also be more attractive from a Treasury perspective.”
When it comes to taxing DB accruals as a benefit in kind under a TEE system, the report says there is a choice between “simplicity, fairness and a mid-range compromise”.
It adds: “Given that DB schemes are already inherently unfair to many individuals, simplicity should trump fairness.”
Johnson says: “The recently announced Lifetime Isa, immersed in the auto-enrolment regime and ideally incorporating a Workplace Isa, could be such a vehicle. The ‘What of DB in a TEE world?’ question can be resolved without triggering operational paralysis amongst industry providers: it is as much a question of will.”