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Osborne’s smokescreen consultation on pension tax relief

Sam Brodbeck

When is a consultation not a consultation?

When the Treasury published its paper on tax relief reform, the answer from the pensions industry seemed to be ‘when George Osborne launches one’.

Providers across the land groaned as one when the Chancellor announced in the summer Budget he was “open to further radical change – pensions could be taxed like Isas”.

The accompanying consultation revealed a full range of options, from the nuclear choice, flipping from exempt-exempt-taxed, to taxed-exempt-exempt, to a two-for-one flat rate of relief, to no change at all.

The problem for Osborne is no-one trusts him since he sprung the 2014 Budget changes and tore apart the annuity market overnight.

Commentators feared he’d done it again, already made up his mind and that the consultation was a smokescreen of phantom engagement with the industry.

As the submission deadline approaches providers have begun to drip-feed their responses.

The radical ‘pensions as Isas’ option, most vocally trumpeted by the Centre for Policy Studies’ Michael Johnson, has few advocates.

Instead consensus has gathered around former pensions minister Steve Webb’s favoured flat rate of relief set at around 30 per cent. The logic being this will more fairly distribute relief and consumers will understand the buy two, get one free model.

Compared to flipping to TEE, the flat rate model seems a moderate compromise – but was this Osborne’s plan all along?

AJ Bell’s head of platform technical Mike Morrison theorises including Johnson’s extreme solution has made selling the concept of a flat rate a lot easier.

However, pensions experts say introducing a single rate of relief, though less radical, could still cause mayhem.

James Hay head of technical support Neil MacGillivray says any changes would have to apply to defined benefit scheme members too.

“Everyone is ignoring the impact of the flat rate on final salary pensions”, he says.

He says people in unfunded schemes “could see themselves with really large tax liabilities” in a flat rate world.

The Treasury may be moving fast – the consultation closes on 30 September – but it will still be months before the Government makes its direction of travel clear.

All the while, warns Dentons director of technical services Martin Tilley, product development grinds to a halt.

He says providers are holding back from working on innovative new products until a decision is made. Acquisitions are even on hold, he says, as it is impossible to predict cash flows while the tax system’s future is unknown.

All of which means consumers and advisers will have a while to wait yet for the stream of post-freedom pension products to really start flowing.

Sam Brodbeck is pensions reporter for Money Marketing

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. I guess you could have one rule for defined benefit and one rule for defined contribution. That would seem to solve the problem, and probably in the government’s favour as most of the defined benefit schemes are large companies or government schemes where the majority of members will be 20% tax payers. Therefore the government get to pay 20% tax relief rather than 30% on these and only 30% on the large SIPPs for company directors.

  2. Maybe this solution would partially address the problem of the more generous treatment of Defined Benefit schemes when testing against the LTA, Defined Contribution members have to put more in to end up with a similar pension, so maybe they should get more tax relief.

  3. It is a pity that the government keeps bringing in ever more uncertainty. The cost to providers (and therefore the “passed on cost” to consumers) of adapting already creaking computer systems to enable a new form of tax relief will be vast, and for how long will this change (whatever it might be) last? The principle of rewarding people for saving long term is what distinguishes pensions from other forms of savings. I appreciate there is a massive black hole in UK plc’s finances and that changing tax relief will save £billions for the government (this is the REAL reason for the change and the consultation IS a smokescreen), but actually it would be far better to leave pension tax relief unchanged and tax people on their income at the other end. And to tax people properly on the income that is not used to fund pensions NOW. The lifetime allowance, whilst only affecting a small number of people, is unfair. Changing the goalposts and the rules of the game after the game has begun is just not right. Public Sector final salary schemes are no longer affordable for the taxpayer and the government needs to negotiate fairly a way of stopping further accrual to such schemes. And yes, doing it fairly would involve wage increases for public sector employees, or maybe just making really good employer contributions into DC schemes or both. But the trouble is the government don’t play fair and just try to impose change without giving anything back. Shame we don’t have a government with backbone.

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