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Steve Webb: Hammond won’t keep his hands off pension tax honey pot

With his balance sheet under serious pressure, the prospect of raiding pension tax relief again in the Budget will be too hard to resist

With the Budget just a few weeks away, we are hearing the usual rumours about potential cuts to pension tax relief. So, how likely is Chancellor Philip Hammond to raid tax relief yet again and, if so, which elements of the system look most at risk?

There is no doubt Hammond faces pressures on both sides of his balance sheet.

On spending, the public sector pay squeeze has given successive chancellors a good deal of room for manoeuvre. But now there are signs of a relaxation of the squeeze, pay bills look set to rise considerably. On top of that are the usual pressures of keeping the NHS going, paying for the promises made for the deal with the Democratic Unionist Party, doing more for younger voters and a whole host of other demands for additional public spending.

On revenue, things look challenging as well. Forecasts of productivity growth will be revised down, cutting into the Chancellor’s tax base. In addition, there are policies which have previously been announced and where the Government has banked the cash, but where they were never implemented.

This includes the planned 1 per cent increase in the National Insurance contributions of the self-employed which was announced then reversed, as well as the planned hike in probate fees which never went ahead. These two policies alone were set to raise around £800m per year.

A Treasury minister was recently seen walking up Downing Street with a sheet of Budget options which were partially captured on camera. The document suggested that even a flagship policy such as the raising of tax-free personal allowances could be scaled back. If the Government is looking at significant U-turns of this sort, then we can assume pension tax relief will also be in its sights.

For those of us who spend our time in the world of pensions and advice, the idea of further cuts in tax relief may seem hard to justify. We can already see that a £1m lifetime allowance is far from enough to pay for a life of luxury in old age, and many of those catching up in later life for a pensions shortfall would not appreciate further cuts to the annual allowance.

But the world looks very different from the Treasury. Latest figures show the cost of pension tax relief rose by around £3bn in the last year, while the cost of not levying employer NI contributions on pension contributions rose by a further £2bn. The Government sees tax relief as a bloated area of public spending in need of reform.

In terms of where the cuts might come, the annual allowance is likely to be top of the list. Having increased annual Isa limits to £20,000, the Government may say no one needs to be able to put £40,000 into a pension as well. A reduction to £35,000 or even £30,000 cannot be ruled out.

Linked to this, the complex and messy “tapered” annual allowance could also be in the Government’s sights. A reduction in the threshold from £150,000 per year to £125,000 would raise significant sums and would be unlikely to create a political backlash.

Less likely, but still possible, is a further cut to the lifetime allowance.   Although the current lifetime allowance is starting to bite on many people who are not “super-rich”, the Government might feel it could get away with a cut to a figure such as £900,000 without a political storm.

One area where cuts are unlikely is in the pension commencement lump sum. If a chancellor were to tell people who were approaching retirement that they were going to lose 40 per cent of their lump sum, the revolt would make that over the March Budget look like a tea party.

While pension policy and tax policy should be strategic and for the long term, the brutal reality is that pension tax relief has always been – and continues to be – a pot to which hard-up chancellors will return for another dip.

Steve Webb is director of policy at Royal London

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Nicholas Pleasure 7th November 2017 at 11:25 am

    I know as advisers we love pension tax relief but it is expensive and most of it goes to the rich so it’s an easy target.

    He won’t touch the lifetime allowance – he doesn’t need to; he will just ignore it and let inflation do his job quietly for him (see IHT Nil Rate Band).

    The annual allowance is a good target and is my guess as to what he will go for. Most people in this country cannot afford to make £40K of pension contributions. An annual allowance of £20K to match ISA’s would look neat (not to us advisers I know). After all, that is £80K of tax beneficial savings a year for a couple, which still looks pretty generous to people earning the average wage of £26K.

    I’m wondering about employers pension contributions. That would raise a lot and the ‘general public’ wrongly think that corporation tax is just paid by fat cats. It would mean that the Torys would never receive a single vote from an entrepreneur ever again though, so probably too greater political cost.

  2. Hi Steve

    Pension and Politics like the National Health Service and Politics
    Lot of hot air and wind and bugger all gets done

    Maybe it is time that we had a sensible conversation in this country on how manage these two issues
    Like it or not the population in the western world is ageing yet the political classes are doing nothing about it
    OK here is my thoughts on the area I feel I am qualified to debate

    State Pension should not be a Universal Benefit and should be a safety net for those that need it This would enable Governments to put resources else to say NHS or lower taxes.
    People should be warned if they use their pension resources on the yellow Lamborghini tough don’t expect any help from the state
    Pension benefit and all tax incentives for companies should stop and be removed in its place companies could pay higher wages
    Finally, there should be tax neutrality on all savings Tax befits on home ownership should be reviewed
    Public sector pensions should cease and public sector workers compensated by higher salaries This would enable higher wage
    What is the alternative a Low economic growth in western world resulting in low wages and standards of living, high taxes and poor level of public services?
    Take your choice

    • Nicholas Pleasure 7th November 2017 at 11:54 am

      Hi James, Gordon Brown suffered when he introduced Pension Credit. In it’s original incarnation it was a massive disincentive for regular people to save into a pension because if they did, they would lose their pension credit. Therefore you either had to save a massive amount otherwise you were better off spending your money now and letting the state pay later.

      Your idea of means testing the State pension would mean that most people would simply stop saving for retirement because they would be able to save an insufficient amount to make themselves better off.

      I’m interested as to what your solution is for the person that wastes their pension fund and who decides what a waste is? Are you planning to leave them to die on the streets, or are you going to fund some charity to pick them up?

      The solution is probably a reasonable simple flat tax rate which is hard to avoid and low enough to make payment cheaper than avoidance.

      • HI Nicholas and every one who has joined the debate.
        The comment I made above came from an article called Tomorrow’s pension that was publish 1992 In my opinion comments highlighted above are still valid today as they were first made in 1992.
        The point I was making is the debate should have started then(1992) and not 25 years later
        If you would like a copy please e-mail at jclancy@accesswm.co.uk
        and I will be delighted to send it to you

  3. Dear Mr Hammond

    Whilst I do understand the need for collecting taxes, I believe that there are unintended consequences of the taxation of dividends for small business owners and that there are also some other inequitable pension taxation issues.

    I accept that if a person has a large portfolio of investments creating didvidend payments that they should be taxed. So, assuming that they have already used up their annual personal income tax allowance, someone receiving £5,000 (£2,000 from April 6 2018) in dividends pays no tax, they then pay 7.5% on divdends within the basic rate threshold and 38.1% in the higher rate tax band. This is all fine.

    However, if you are a small business owner, you first have to pay Corporation tax before dividends, which is 19%.

    So someone who is a small business owner receiving £5,000(or 6 April 2018, £2,000) in dividends pays 19% in tax, they then pay 26.5% on dividends up to the basic rate threshold and then a whopping 57.1% in the higher rate tax band.

    I own and run a small Independent Financial Advice business and I already have to pay FCA annual fees, Business Profesional Indemnity annual fees and Information Commissioners Office annual fees.

    If I own a large investment portfolio or I am employed and receive dividends, I pay 19% less in tax than an owner of a small business. Surely this is not equitable?

    Perhaps you could look at a threshold of profit whereby corporation tax on dividends, for registered small business owners with turnover below say £1m, between the annual income tax personal allowance and the basic rate tax upper threshold ,were not subject to Corporation tax before payment?

    I also believe that the HRT band should now start at £60,000, the additional rate tax band should be brought down to £100,000 and the loss of the personal allowance of £1 for every £2 earned over £100,000 (equvalent to a 60% tax rate) should be scrapped or at least linked to RPI.

    and finally……… the pensions ubiquitous age 75 restrictions.

    Govt. says that it has moved the State Pension to age 68 (no doubt moving to age 70 eventually) due to people living longer and yet the age 75 restrictions have remained the same and also the pension acccess age is being moved from age 55 to age 57.

    These restrictions being; no pension tax relief after age 75, pension inheritance only tax free up to age 75 and then taxed at the recipients’ marginal rate and if you have not taken your tax free PCLS before age 75 and then die before taking it, you lose this tax free benefit.

    So, surely this age 75 restriction should move up with the same upward movement as the state pension age to remain 10 years afterwards, 78?

    I also do not understand why, when the standard rates of income tax are 20%, 40% and 45%, that CGT is only 10% and 20% or 18% and 28% on property. There are legal ways of mitigating CGT and if people do not use them, then they only have themselves to blame for paying CGT.

    Perhaps someone could cost these ideas / changes and let me know?

    Maybe they could be changed in this month’s budget statement?

    • Nicholas Pleasure 7th November 2017 at 1:47 pm

      Really good points here. The law of unintended consequences rears its ugly head again here. The 7.5% dividend tax means that I now throw much more of my profit into my pension rather than pay the tax. Therefore the treasurys extra tax actually means they get less not more.

      I’m sure I’m not the only one.

      Of course they could stop tax relief on employers contributions.

  4. The ever-increasingly irritating elephant in the room – public sector defined benefit pensions. What is the cost? Do they represent value for money? How can they be deemed sustainable despite the tide of private sector actuaries having long-since concluded otherwise? Is the public purse bottomless when it comes to these pensions?

    • Bingo. I agree Mark.

    • In mid 2013, the public sector employed 5.7 million people, which was just under 20% of all those in employment at that time (source: Institute for Fiscal Studies). Whilst still a huge number, this was, apparently, still the lowest figure in 40 years!

      The figure has continued to drop, and substantially so since then. The public sector workforce is predicted to fall to 1.1 million by 2018-19 by the Office for Budget Responsibility. Somewhat surprisingly, this will still equate to 14.8% “of those in employment”…

      In the 1980’s, there was a large reduction in in general government employment due to the mass privatisation of state owned industries, and this continued into the 1990’s when general government employment fell by a further 350,000.

      Meanwhile, the NHS and education workforce has burgeoned as a proportion of the public sector over the last 50 years as demand has inexorably increased for these services, rising from 23% of the public sector workforce in 1961, to 54% by 2013.

      I’ll leave you guys to do the maths on all this stuff.

      The point is that it is the LEGACY of final salary defined benefit pensions that is killing us, rather than the current employees accruing such benefits.

      That being said, the overall percentage of public sector workers with such benefits as compared to everyone in employment (rather than in retirement, full time education, or unemployed in whatever capacity), still represents a substantial relative percentage of all those in work paying taxes to support it.

      For these reasons, Defined Benefits need to cease going forward to be replaced by Auto Enrolment or similar as it applies to the rest of us mere mortals. It is a massive and demonstrably unfair burden on tax payers across the UK and as such it is morally wrong that it should be allowed to continue in it’s present form.

      Give these workers a pay rise, fine, but we have to axe the pensions system going forward in return; you can’t have it all ways.

  5. As ever, a balance is required and I don’t think that means-testing State pension for all those that have paid NICs towards it for 30+ years is the answer (there would be a justifiable revolt!!). Nor do I think that removing employer tax or NIC relief on pensions contributions is right, as it will just mean they reduce conts or remove schemes (especially DB) as too costly, which will impact on non-State pension provision.
    By all means reduce the Annual allowance to £20k with full tax relief, but keep the Lifetime allowance at £1m. Reinstate the 1% NIC rise for self employed who, lets face it, now get same State pension as everyone else!
    These changes will have relatively little impact on those affected, but raise significant revenue I would think.
    If you tinker too much with pensions and make it more complex, people will become more disillusioned and not save (at a time when they can afford too in their 50s) which is the complete opposite of what the Govt want – self funders!

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