I can understand why almost the entire financial services industry wants the Chancellor’s freedom and choice in pensions initiative to succeed. But I am surprised that nobody seems to want to talk about the apparent £10bn to £15bn hole it leaves in the public finances. Because as we saw with consultancy charging, burying heads in the sand only leads to more problems later down the line.
I too want the project to succeed. But I want it to do so on firm foundations. The way things are presently constructed, I do not believe the proposed structure will last a year.
The Treasury’s response to the freedom and choice consultation introduced a new measure to control recycling and limit the scope of sacrificing salary for pension. But by its own admission, it will only deter a tiny proportion of the nation’s over-55s from managing down their tax bill by opting to be paid more pension and less salary.
The Treasury document, in its desperation to show that it is not limiting the core principles of flexibility and freedom, says that a £10,000 annual allowance for triggering flexible drawdown will only impact 2 per cent of the working population.
This means that for 98 per cent of the population, the measures announced at the end of July are no deterrent whatsoever to them opting to be paid pension – with no employer or employee NI and 25 per cent tax-free – rather than the heavily-taxed salary route. Yes, they are limited to £10,000, but that is still pretty attractive, and for those with salary sacrifice and bonus sacrifice structures in place, it will be a no brainer.
Some industry figures had expected anti-avoidance measures to be introduced on top of the reduced annual allowance for those who go over their 25 per cent tax-free cash. The Treasury has confirmed that anti-avoidance rules will not be introduced – instead saying it will keep out a watching brief for individuals exploiting the new rules for unintended tax advantages.
But given we have no idea what these are, what are pension advisers supposed to do? All we can do is accept what the Chancellor told the nation in his Budget speech, and has subsequently clarified in its consultation response, namely that individuals over 55 can receive £10,000 into a pension and draw it out immediately, a quarter of it tax free. So surely this is what a good adviser should tell its clients.
This is costly for the Government. For every basic-rate taxpayer currently not paying into pension that does that, the Treasury loses £3,080, made up of £1,380 employer NI, £1,200 employee NI and £500 income tax. For 40 per cent taxpayers, the figure is £3,580. Yes, some will be paying some pension contributions already, although pre-auto-enrolment the majority were not, and since then most have come in on 1 plus 1 per cent.
So if we assume there are probably around 5 million workers over age 55 – there are already more than a million over state pension age – then its not fanciful to calculate the amount of tax at risk from this policy being somewhere between £10bn and £15bn. Obviously not all will take the option, but even if one in 10 do, that is a lot of money lost by the Treasury. And it would pretty much obliterate the extra revenue from people cashing in pots – £320m in 2015/16 rising to £1.2bn in 2018/19 and then falling back to £300m the following year.
This is clearly not going to be allowed to happen – the country simply cannot afford it. So rather than put things in place and undo them later on, why not be honest with ourselves and get some clarity in place now? My suspicion is, because its too complicated. The Chancellor has promised the earth and this is an elastoplast solution to get us past the next election, at which point there will be wholescale and severe changes to the way pensions are funded through tax relief.
When it comes to pensions tax relief, advisers are always telling clients to make hay while the sun shines. If the Chancellor said you can do it in the Budget and following documents, surely it must be okay.
John Greenwood is editor of Corporate Adviser