Pension Isa architect Michael Johnson has hit out at the pensions industry’s “vested interests” in preserving the current model of tax relief and says radical reform should also tackle public sector schemes.
The Centre for Policy Studies research fellow has led calls for the Government to switch from the current exempt-exempt-taxed model to taxing contributions on the way in with withdrawals tax-free.
ChancellorGeorge Osborne could bag up to £114bn if the Government opts for a “big bang” switch to a model where pension income is tax-free in retirement.
But following the Treasury’s consultation on tax relief reform, industry consensus has gathered around a flat-rate of relief. Experts have warned applying the changes to defined benefit schemes will be hugely complicated.
But Johnson refutes claims the impact of DB schemes will be too great.
He adds the Government should use the opportunity to move public sector schemes from DB to defined contribution.
He says: “I get really fed up with people with deep vested interests saying ‘this is far too difficult, what about DB?’ Others have done it, and there’s a lot to learn from how they did it. New Zealand made some mistakes but they did it in the 1980s. It is perfectly doable, it’s just a question of whether there is the will to do it.”
He admits there are “a myriad of calculation challenges”, particularly around rates of accrual on DB schemes, but argues similar complexity “already exists”.
He says: “Many people who are against change are those who earn their living from the complexity. The real threat to consultants is the enormous simplification that would materialise if we went to TEE that would hugely benefit the consumer and would not benefit them.”
Open DB schemes are now almost solely the preserve of the public sector. In 2011 Treasury secretary Danny Alexander promised no changes for 25 years.
But Johnson says subsequent legislation leaves the Government room to manoeuvre.
He says: “We are going to have to confront the DB public sector question anyway. Indeed it may be the Treasury comes up with a very clever way of facilitating a transition to TEE which also address the public sector question.”