There has been a lot of talk since the referendum around the changes that might come about due to the need for the country to raise cash. We now have a new Prime Minister and a new Chancellor, both of whom could influence a complete or partial change of policy with regards to our pensions regime. However, apart from the fact they have bigger initial battles to worry about, there are good reasons why things will probably stay the same.
It has been suggested the reversal of the death benefit changes introduced alongside the pension freedoms could be a U-turn for the Government, increasing the tax taken when pension members die. In the grand scheme of things, I suppose it would not be something people would complain about. But that is not a reason to do it anyway.
The changes were given a warm welcome when they were introduced but they were not the big giveaway many people thought they were. Those that have small funds are likely to draw them down before age 75 now they have the option to do so. Those with larger funds and likely to be able to leave them to later generations will tend to live longer, meaning funds left will be taxable as income on the recipient.
I believe there would be some increase in tax, should the changes be reversed, but it would still incur the costs of change. So by undoing them they will not suddenly start producing the buckets of tax needed to swell the coffers. With this in mind, it seems pretty unlikely all the work and hassle would be worth it.
“Apart from the fact that the Government has bigger initial battles to worry about, things will probably remain the same”
There has been more talk about the imminent demise of pension tax relief. If it were brought in across all pensions this would mean more tax remaining in the Government’s purse, but it is not something that can be changed overnight.
The biggest issue would be for defined benefit schemes, where there are already likely to be problems with regards to increasing deficits. The removal of personal tax relief would mean reduced funding, of course, but in the complexities of monitoring it would be massively costly.
If you want to stop any personal tax relief, then you will need to monitor employer contributions and salary sacrifice arrangements too. Employer contributions are really just deferred pay in the end and therefore should also be taxed. This is not too difficult in a defined contribution scheme but much more so in the DB scheme.
If the Government did not have so many DB schemes themselves, they would just let the industry worry about it. But the cost to them will probably outweigh the tax they would save.
I hope the Chancellor agrees now is not the time to try and put his stamp on pensions. After all the surprises and short-notice changes with far-reaching consequences we have seen, it is time to let the pensions industry settle.
Claire Trott is director is head of pensions technical at Talbot and Muir