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 email@example.com