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Nic Cicutti: Why the Govt has got it wrong on pension tax relief

Here is a question for you: is it possible to square two comments, one of which involves ruling out a “fundamental” shake-up of pension tax relief, while simultaneously stating the Government “will not shy away from the big decisions and where change is need it will be made”?

Not in my book – and I suspect not in the minds of anyone else who read the recent self-penned column written by David Gauke, the new work and pensions secretary in the Financial Times last week.

Gauke, who stepped up to the plate after his predecessor Damian Green was effectively elevated to be Theresa May’s deputy, is the third minister appointed to the office since the 2015 election.

The key question for those with an interest in pensions is that of whether Gauke’s arrival will lead to any major change or further reforms of a tax relief system everyone knows is creaking badly.

The truth is while the coalition government did partially overhaul the pensions system, with Maseratis and Ferraris pouring out of our gleeful local dealership in Lyndhurst, the rest of the system is largely unchanged.

Sorry, that is not entirely true: the Government has acted to hack away at the lifetime allowance for pensions savings, limiting the total pot to an annual income of £40,000 or a lump sum of £1m, after which it faces a 55 per cent charge if you take it as a lump sum, or a 25 per cent charge if you take the money as income. This is in addition to any tax payable on the income in the usual way. The logic behind such a move is beyond me: doesn’t the Government want people to save more?

Far more important is the consequence for low and middle income earners of the government’s refusal to alter tax relief levels to encourage them to save. According to the Pensions Policy Institute, in the last year before auto-enrolment came into effect savers in the £0 to £44,999 income level claimed 41 per cent of total tax relief for pensions contributions. HM Revenue & Customs calculates the amount of gross relief for that year at almost £35bn, or about £20bn net after income tax was paid on pensions in payment.

This means almost 60 per cent of that net tax relief, again according to HMRC figures, went to about 5 million people – out of about 30 million taxpayers in total.

It is true the pensions savings landscape has changed significantly since the introduction of auto-enrolment. The increase of about £3.3bn in tax relief in the 2015/2016 tax year compared to the previous year is estimated by HMRC as the result of an increase of people saving into new employer schemes. But even that figure tells us how small the level is of tax benefits enjoyed by contributors into such schemes, most of which are aimed at low to middle-income earners.

Last week Gauke did say he would like to see auto-enrolment being offered to the self-employed, those working in the so-called “gig economy”, as he put it. Actually, I have serious problems with the term, which implies a carefree, largely voluntary choice of working lifestyle, whereas we know how in practice people can be forced into taking such roles because proper jobs are not available for them.

My concern on the pensions front is the context in which an “offer” to be part of the auto-enrolment system be made. Last year, The Resolution Foundation found that average wages for the self-employed were £240 a week. You are asking people who barely have two pennies to rub together to contribute at least 2.4 per cent of their qualifying earnings after April next year, rising to 4 per cent after April 2019. Moreover, there will not be any employer contributions.

In turn, if you start telling the self-employed they have the option of opting out of a pension scheme, you can bet your bottom dollar that the opt-out percentage will be far higher than the 10 per cent or so seen so far.

Unless, of course, you make it clear that a failure to contribute to your own final retirement income will impact on the state pension you receive if you are self-employed. Won’t happen? Don’t bet on it: in his March Budget, the Chancellor announced plans to hike National Insurance contributions for the self-employed. He was only forced to abandon them because of May’s failure to win a Conservative majority in the general election.

The truth is we do need radical reforms of the tax relief system to encourage more young people and the lower-paid to save more. Handing the vast majority of tax relief to a small minority of taxpayers who are already reasonably well-off is not the way forward.

Gauke sitting on his hands because, as he says, he does not have a parliamentary majority to enact the necessary changes is not good enough.

AJ Bell head of platform technical Mike Morrison has called for an independent pension commission to be set up, to bring long-term focus to pension policy. I agree entirely – and the first thing it needs to do is look at pension tax reliefs and where they ought best to be targeted. How about it Mr Gauke?

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. Agreed. We need joined up thinking to ensure pensions benefit everyone. Simple rules are required and then a commitment not to fiddle again! A flat rate 30% tax relief on contributions, abolishing the LTA and capping annual allowance at £40000 will satisfy most if not all commentators and governments.But the biggest issue will be cross party agreement; unless this is achieved we will never have long term government planning on pensions.

  2. Robert Milligan 12th July 2017 at 3:38 pm

    Why O who do we need this old Nappy pappy state to help us save, We have ISA and LISA, both provide Tax Efficient growth, Both offer Cash or Risk based Investments, but unlike a Pension 100% post-60 Tax Fee Income and Encashment, With the Level of contribution set currently at £20,000 well above 99% of peoples affordability who things a pension is a good idea, Okay , lets please stop calling it Pension funding, its retirement asset building to provide Retirement Income at an age as when one has sufficient funds to provide the required income and as for Higher Rate Relief, this should have been stopped years ago, but I suppose if it had so would the pensions industry, Now would not that be a thought

  3. Just make pensions tax relief for higher rate and basic rate tax payers 30%. Problem solved.

  4. Dominic Thomas 12th July 2017 at 4:13 pm

    Spot on.

  5. Trevor Harrington 12th July 2017 at 4:17 pm

    If the Government was to announce the temporary elimination of higher arte tax relief on pension contributions, and at the same time reschedule a return to state pensions at age 60 … for all … then I hardly think anyone could complain … other than those higher rate taxpayers, who have been milking the system for years.

    As a civilised society, we really cannot persist with an ever increasing state pension age … when manual workers simply cannot continue working at these later ages … the result is a false economy anyway, as they need ever more and more care from the NHS.

    And please do not tell me that we are all living longer because that is another fallacy, bordering on an outright lie – ONS stats DO NOT say that we are living longer … in fact the average life expectancy for males and females in this country has hardly changed at all in the last 50 years (still roughly 84 / 86)

    Apart from all that … can you imagine the superb boost to the macro economy by having state pensions awarded at age 60.

    As I have gone on record and said many times … there is ample tax revenue coming into the treasury for us, as a civilised society, to afford all the things which we could reasonably ask for … it is just that currently, taxation revenues are being spent in the wrong places … watch out the Public sector … we cannot afford your massively unfair and stupidly generous contracts of employment and employment benefits.

    • Trevor

      I’m looking at ONS stats as I type this 50 years ago the average for a man was 68.1 for a woman 74 in 2011 it was 79 and 82.8

      Probably higher now I guess

      • Trevor Harrington 14th July 2017 at 6:27 pm

        Good to speak Nick,

        I can only think that you must be reading the wrong bit – I certainly remember in my IFA training in the early 1980s that average life expectancy was around 84 and 86 ….

        If in the figures you are looking at, they are averaging back into the war years and the post war years, then quite obviously things have changed.

        You must look at the average life expectancy – but not average back before 50 years ago – in other words only use the years from the mid 1960s onwards, and you will find that average life expectancy has not changed from the 84 male to 86 female average.

        It is true that more people are living into their 90s and even 100 plus … however, we have many more people dying in their 50s 60s and 70s … I would venture that this is due to obesity and substance abuse … and that problem is not going away any time soon.

  6. Overall I absolutely agree. Except for the idea of curtailing the better off from tax relief. As Nic so rightly says the Govt (any Govt) doesn’t really and truly want any of us to get any richer. They shed crocodile tears about the lack of saving but do nothing about it because they need the tax and rely on people spending to hold up the economy.

    They may well find that many of the really high earners will soon disappear when (as seems likely) they make a mess of Brexit. For those that remain the Govt continually messing with pensions will just kill off anything other than AE. And this is a scheme that has dumbed down pensions past all recognition.

    I wonder how long before a cash strapped Govt reneges on ISAs, reduces the investment amount, curtails anything over a certain portfolio size and starts to tax what has hitherto been tax free income and gains.

    We can then either emigrate or put our heads between our legs and kiss our botties bye bye.

  7. Robert Milligan 12th July 2017 at 5:51 pm

    Take higher rate relief away plus the PCLS, then say “What Pension”!!

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