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MM leader: Govt is dodging a bullet on pension tax relief

Natalie Holt website

After being berated for failing to consult with the industry over the rollout of pension freedoms, George Osborne may have just learned his lesson.

Last week’s Summer Budget saw a very loose and open-ended consultation on pension tax relief and “strengthening the incentive to save”. Apart from floating a vague idea about “treating pensions like Isas”, it is clear the Chancellor is expecting financial services firms to come up with the answers.

For Osborne, the watchword for any new model for pension taxation is “sustainability”. In other words, he wants it to be cheaper. With pension tax relief costing the Government almost £50bn in 2013/14, you can see why.

When you dig into the specifics of how to unravel the current pension tax regime, there are no easy solutions. This is a bullet the Government is only too eager to dodge.

Firstly, let’s deal with moving to the taxed-exempt-exempt model. There is the knock-on impact that taxing contributions aimed at plugging pension deficits would have on already-strained defined benefit schemes. There is also the interaction with auto-enrolment to consider, plus potential wrangles with European regulators over creating a pan-European pension.

Another objective Osborne wants to achieve is for any reform to pension tax to be “simple and transparent”. Advisers, providers and lobby groups have plenty of time (around 11 weeks) to meet this brief, and there are some alternative models already to hand: a flat rate of tax relief set around 30 per cent, as first mooted by Steve Webb; scrapping the lifetime allowance; Government top-ups or matching contributions to encourage lower earners to save.

Yet as Osborne preaches about simplicity, in the same breath he seems determined not to deliver it. From April 2016 higher earners will see their annual allowance tapered, so that those with income above £150,000 will be limited to £35,000 in annual pension saving, moving down to £10,000 for those on more than £210,000. The net has been cast wider than previously thought as income has been defined to include individual and employer pension contributions. Coupled with the changes to pension input periods, the resulting system is more complicated, not less.

The tapered annual allowance is also a vehicle to reduce pension tax relief further still if Osborne or future chancellors are blinded by pound signs in their eyes down the line. How this squares with “strengthening the incentive to save” has not been made clear.

Natalie Holt is editor of Money Marketing – follow her on Twitter here

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. “Yet as Osborne preaches about simplicity…” Simplicity, really? The one thing a radical change to the taxation of pensions will deliver is yet another layer of complexity. Politicians like George could not deliver simplicity if their lives depended upon it.

    He already knows what he wants to do he is just not honest enough to say so. As you point out his left hand is offering a green paper for “consultation” whilst his right hand retains all the current pension taxation complexities.

  2. John Shackleton 16th July 2015 at 11:04 am

    Agree Nick.
    £50bn in tax relief….incentive to save then taxed on the way out. So where is the figure showing how much the Govt RECEIVE in tax from pension in payment. Without the incentive to save, this would not be happening. You cant have one without the other!!
    The real fear is to try and make a short term tax hit to help with the mess created in the first place by those in power and it screws up the long term benefit for all.
    Just leave it alone for 5 mins!

  3. To reduce complexity, just limit income tax relief to a flat 20% on all contributions, and abolish the Lifetime Allowance. Simples.

  4. I don’t think that Osborne is bothered about the practicalities – he has £ signs in his eyes. I suspect that what has caused him to distance himself somewhat from the proposals at the last moment is the realisation that this is quite likely to dent ongoing savings signficantly; and if it does, there will be no hiding from the fact. It will show up clearly in the official figures and his enemies will have a field day.

  5. Justin for Pensions Minister!!

  6. Christine Brightwell 16th July 2015 at 11:34 am

    Agree with Justin. Looked at in the round all is a bit alarming. Less tax advantage to saving into pension, members can draw out the whole lot at 55 (paying £ to the charming Mr Osborne) possibility of TEE, which will screw up auto enrollment, plus less and less people will be eligible for aa if the threshold continue to be pegged at the personal allowances – and then remove as far as possible the welfare for those who cannot afford to live/ have used up their pension pot.

    Still, the more complicated it is the more the advisers will earn, has Mr O got shares in the advisers companies?? I think we should be told!

  7. John – last tax year around £13 billion was collected in income tax receipts from pensions in payment, according to HMRC

  8. John and Greg
    So from these figures two questions will arise: what will be the tax take this year following the Pensions Freedoms, and what were the figures for cost of tax relief 20 / 30 years ago when the current pensions in payment were being built up?
    Looking at an ONS chart in another MM article it seems that the cost of pensions tax relief was certainly below the level of £13Bn as late as the millenium, so with an increasing retiree population I expect to see a similar rate of growth in the tax take from pensions in payment over the next 10 years as we have had in the cost of tax relief over the last 10!

  9. Justin’s model seems fine for individuals but what about salary sacrifice for members in group schemes inc AE? Is that something we wish to see end?

  10. Be careful what you wish for with all this flexibility.

    If pensions in effect become pseudo ISAs will they still be afforded the current protection against creditors and be ignored for calculation of benefits purposes?

    • Sean – Pensions not yet in payment are not ignored when benefits are calculated e.g pension credit. Also Horton vs Henry is under appeal so watch this space!

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