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Kim North: Who can save us from pensions complexity?

Kim North

I cannot remember a time when there have been so many changes to the pension landscape. We have complained for years  legislation should be simplified in order to help people understand it, yet levels of complexity are still being added.

New jargon introduced by the pension freedoms, such as UFPLS, now sits on hundreds of websites. It is no wonder advisers are seeing clients that have taken all their cash without realising large income tax bills would be forthcoming.

Frankly, the pension freedoms have made retirement income planning more complicated. So what should we do about it?

Banks and providers need to educate their customers about the perils of later life poverty if they cash in their pension, and technology should be made available for all free of charge to calculate longevity and lifetime cashflow. I also agree with the Financial Inclusion Centre’s Mick McAteer’s recent cry for a non-profit national advice service that complements advisers. The Government’s continual pension raiding through actions such as reducing annual and lifetime allowances could easily pay for this service.

When I read the Government faces a revolt over flat-rate tax relief plans recently announced by Chancellor George Osborne, I want to tell these Tory backbenchers to grow up.

I am a fan of the flat rate of tax relief expected to be set at around 30 per cent for all. After all, how can it be justified that five million people paying higher rate tax get more tax relief than those on lower income tax bands?

The current taxation basis for pensions has been in force for over 90 years, so it is due for a change. Higher rate taxpayers will fund their pension before 16 March if they are sensible.

Another reason I like the idea of a single rate is social responsibility, which means an entity, be it an organisation or individual, has an obligation to act for the benefit of society at large. A single rate pension tax relief introduction would do this.

With micro businesses needing to auto-enrol, the prospect of higher levels of tax relief makes joining the workplace pension scheme more attractive for the 24.5 million or so people that are not higher rate taxpayers. It will also generate a saving of over £2bn to the Government, which could be used to fund the pension advice service McAteer speaks of. As for the blatant discrimination against women born between 6 April 1953 and 5 January 1954 as to when their state pension age is, it is outrageous. The uproar over sex inequality seems entirely justified, considering the fact it does not apply to men.

I have always been a David Bowie fan and would sing along (out of tune) to “we can be heroes, just for one day”. At this moment in time, we really need a pensions hero. Pensions minister Ros Altmann is my favoured candidate and I urge her to stop this discrimination.

Kim North is managing director at Technology and Technical 

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Kim, when i read comments that the likes of yourself make to push a politican agenda such as ” Iam a fan of the flat rate of tax relief expected to be set at around 30 per cent for all. After all, how can it be justified that five million people paying higher rate tax get more tax relief than those on lower income tax bands?”

    Are you honestly trying to say you can’t make a case for this, or more likely that it doesn’t suit your agenda?

    Tax relief is merely a means whereby people that are saving to allow themselves to not be a burden on the state when retired are not taxed on the income they set aside to cover this.

    So are you honestly saying that you cannot make a case for those paying say 40% tax to not pay 40% tax on that small amount of money, simply because someone else would only pay 20% on it in the first place?

    Or are you saying that you can justify that someone who pays no tax at all, should be given 30% relief? Whilst the person who pays 40% now and 40% when retired should actually pay 46%, whilst the other person pays effectively negative 42.8%? i.e an effective rate differential of 86.8%?

    So saving for retirement for someone who already pays lots of tax would mean that saving £100 towards their retirement will cost them £111.11 net, whilst for someone paying no tax at all in the first place, saving £100 towards their retirement would cost them £70 net? This is before we even consider such things as the 60% tax trap, the child benefit tax trap, the annual allowance tax trap etc?

    Yet you argue that the current system where everyone pays exactly the same is somehow unfair?

    Or are you citing this because someone might be a higher rate tax payer when working so get higher rate relief, but then be a basic rate tax payer when retired?

    Yet the low paid person paying no tax already pays large negative rates towards anything they put into a pension and then pays no tax when retired. So when exactly do you think this person should make any tax contribution?

    Or do you have a problem with the basic rate tax payer now, who you believe should get 30% relief now and then likely pay no tax in retirement.

    In simple terms this frankly stupid idea of flat rate tax simply means that those who already pay for the state pensions of those lower earners, along with their social security benefits both now and in retirement etc, are now being asked to also pay for a large part of any pension savings they might make beforehand?

    When quite likely those “low earners” will make use of George Osborne’s freedoms, take the cash, spend it all and then fall back on benefits, thereby hitting those that actually pay tax overall even harder?

    If you honestly think this is a good way to promote pension saving, then you are frankly mad, the only thing this silly idea would result in, is an even greater dis-incentive to working hard and improving your lot in life.

    If you want to improve things, you encourage people to take responsibility for themselves, you don’t discourage it and promote a culture of sponging…that road leads to poverty and ruin for the country.

    Did it never occur to you why all communist and nearly all strongly socialist countries tend to have massive financial problems? Even if it takes generations for the chickens to come home to roost..

  2. Andy Robertson-Fox 29th January 2016 at 11:35 am

    Kım North writes of the “blatant discrimination” affecting women born between 6th April 1953 and 5th January 1954 in relation to the State Retirement Pension.
    It is not discrimination at all; it may well be, within the transitional period, disproportionate but it is not discrimination. All those with a birth date within the prescribed parameters will be treated equally, although many see the speed of transition as being unfair, but that is a different matter.
    Perhaps, Kim, you should avail yourself of the plight of the frozen pensioners who, although they contributed to the NI scheme on the same terms during their working lives as everybody else are denied the right to withdraw on the same terms as everybody else simply because of their address….that is discrimination.

  3. “As for the blatant discrimination against women born between 6 April 1953 and 5 January 1954 as to when their state pension age is, it is outrageous. The uproar over sex inequality seems entirely justified, considering the fact it does not apply to men.”
    This is surely blatant discrimination against men!! Why should these women get their pension any earlier than a man with the same date of birth? These people only want equality when it suits them.
    I do agree that a single level of tax relief seems like a simple plan but why do these tree huggers seem to think everything should be not for profit? I would like to guess that both Kim and Mick are receiving a generous stipend.

  4. Maybe we need pension simplification – what we’ve already done that?

  5. “how can it be justified that five million people paying higher rate tax get more tax relief than those on lower income tax bands ?”

    The answer is in the question ! But just saying “how can X be justified…?” is enough to win the day when eyes glaze over at explanations that pensions are deferred pay, and when the Treasury is so short of cash and so hemmed in by promises to protect large areas of government spending.

    “The current taxation basis for pensions has been in force for over 90 years, so it is due for a change”.

    My house is over 90 years old but that’s no reason to knock it down. We are no wiser than the generations before us who left well alone. But the Treasury is short of cash and the industry is punch drunk from all the rounds of legislative change and, for those reasons alone, flat rate relief will probably happen.

    If it means the end of the LTA, and true simplification of the AA, then I can almost forgive them….

  6. Who can save us from pensions complexity? The body that created it in the first place. Simple question, simple answer.

    That aside, can the Exchequer afford to enhance by 50% the tax relief allowable on all pension contributions made by basic and nil rate tax payers? How much will it cost and is it likely significantly to lower the wall of antipathy and mistrust towards saving into a pension plan?

  7. headbelowthe parapet 2nd February 2016 at 1:18 pm

    Pension tax relief is just that, tax relief; and it sits at the top of an individuals earnings so it’s taxed at the rate applicable to the top of the income (the marginal rate). So from a technical viewpoint any fiddling around will completely change its nature – it will stop being a relief and become an enhancement instead. This worries me for the future – which future government will say that they cannot afford such an enhancement and gradually chip away at it to increase tax receipts – yet another nail in the pension coffin…

    We should all try to remember that ART and HRT aren’t getting a fantastic deal they are simply not paying tax on the amount that they put in a pension, just like everyone else. Divide and conquer is alive and well, it seems: ‘Don’t worry your oiky little heads about it we’re only taking money off the rich’, say the politicians, but it’s simply not true.

    One wonders how much work the various payroll systems will need to undertake to cope with any changes that Gideon decides to impose.

  8. Without wishing to be overly cynical Kim, I am not sure you are asking the right question about ‘saving us from complexity’. Vested interests are rife in our sector and complexity helps to create a marketplace where ‘experts’ are paid to simplify/explain etc. Reality is that things like tax, investments, interest rates, inflation, longevity are not easy to understand yet the risks associated with all of these factors mainly sit with individuals, with so few left in DB schemes where such risks sat with the sponsoring employer. Yes I am sure some simplification will help but equally individuals/companies need to take savings seriously and either pay for advice to explain what this stuff means for them.

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