Pensions have seen more than their fair share of regulatory change over the years, with every Budget or pre-Budget report seeming to contain new rules or amendments.
However, reports that chancellor George Osborne (pictured) is planning to reduce the annual allowance for pension contributions for the second time in two years have raised fears that the Government is doing serious damage to consumer confidence in pensions.
Reports last week suggested the Chancellor is considering reducing the maximum amount payable into a pension in any one year and eligible for tax relief from the current level of £50,000 to £30,000.
The coalition cut the annual cap for tax relief on pension contributions from £255,000 to £50,000 in the 2010 Emergency Budget as part of a package of pension reforms. In its consultation in 2010 the Government considered reducing the limit to between £30,000 and £45,000, before setting the higher level. However, it appears that introducing a lower limit is now back on the table.
In February, analysis from Standard Life said the Treasury would save £600m if it cut the annual allowance from £50,000 to £40,000, and reducing it to £30,000 would save up to £2bn. These sums could well be attractive low-lying fruit for a chancellor who still needs to find £10bn of public purse savings.
However, any move to further restrict the annual allowance for pension savings could put people off using pensions as a savings vehicle altogether.
AJ Bell marketing director Billy Mackay (pictured) says: “We had clients after last year’s changes who were cancelling applications despite the fact they weren’t actually directly affected by the rules. They weren’t saving at a level that was above the annual allowance change but they were phoning in and cancelling applications on the back of frustration that the rules were changing yet again.”
PwC pensions partner Marc Hommel says cutting the annual allowance so soon after the last change will speed up the rate of pension scheme closure. He says: “Employers will further accelerate the closure of defined-benefit pension schemes as they become even more complex and expensive to run, and through fatigue with constant changes to the tax treatment. There will be reduced employer and employee savings into retirement arrangements as trust continues to erode in the robustness of the pensions savings landscape.”
Scottish Life business development manager Fiona Tait says she understands why the Government is looking at an annual allowance cut but believes it could prove contradictory to its long-term goal of encouraging more people to save. “It is very natural for the Government to be looking at it, but to do it at this point would disincentivise long-term saving at a time when the Government is desperately trying to increase it.”
Advisers also say changing the rules so regularly makes pensions even harder for people to get to grips with.
Affluent Financial Planning managing director Carl Melvin agrees, saying: “The Government are over-complicating things. If something is working they have to tinker with it and mess it up. The public are not fully engaged with pensions anyway, so there’s no need to complicate it.”
Another argument against reducing the annual allowance is that because any restriction is likely to hit business owners and executives hardest,they are less likely to offer decent schemes to their staff.
MGM Advantage director Andrew Tully believes the cut could cause a “trickle-down effect” as business owners lose faith in pension schemes and so cut back on occupational pension schemes for all staff.
He says: “If you have a business owner who is going to set up a pension scheme and he is fully engaged in pensions and thinks it is a good way to save, he will then be more likely to have a generous scheme for the staff.
“If he is then almost turned away from pensions because he is limited to what he can put in, then in some cases it will have an impact on what he offers for staff.”
Clearly any pension cut would affect high earners, who are able to pay large sums into their pensions; but it is also highly likely to affect many small business owners, who contribute irregularly when their profits allow. The restriction could also have a significant impact on public sector workers.
Richard Jacobs Pension and Trustee Services managing director Richard Jacobs says: “The people it is going to affect most are the public sector workers and civil servants. They are seeing an increase in their contribution rates on one side, and on the other many are going to have to pay more tax if the annual allowance
Bestinvest managing director Jason Hollands says the cut will affect many middle-class investors as they try to play catchup with pension contributions when they approach retirement, once their children have grown up and they have paid off their mortgages.
He says the potential cut to the annual allowance will combine with the reduction in the marginal rate of income tax from 50 per cent to 45 per cent next April and so offers a convincing argument for maximising pension contributions now to take advantage of more generous tax rules.
Hollands says: “None of us has a crystal ball to accurately predict what might appear in future Budgets but, when you stop and think about how attractive pensions are for higher-rate tax-payers, you can begin to understand how tempting it might be for advocates of new taxes on the wealthy to have them on their radar.
If a pension fits your investment objectives and you pay higher rates of tax, then it really does make sense to consider making use of them while such generous reliefs
are available and while the very top rates of income tax remain so high.”
But AJ Bell managing director Andy Bell says even the possible short-term boost to pension saving caused by any allowance change is not something to celebrate.
He says: “Savers are frightened by rumour and press comment in advance of every Budget and Autumn Statement. The financial services industry peddles higher-rate tax relief on a “Buy now while stocks last” basis, which does no one any favours and is a self-fulfilling prophecy.
“The greater the scaremongering, the larger the pension contributions, the higher the cost to the Exchequer, the increased likelihood of a change.
“Altering the fundamentals of tax relief rules on pension contributions is a temptation that no chancellor can ignore in times of weakness. This short-term sugar rush will lead to the disengagement of long-term savers.”
Bell says the power to vary pension rules should be transferred from the Government to an independent commission to prevent the chancellor making a “smash and grab” raid on pensions that could make former Labour chancellor Gordon Brown’s tax raid on pensions look like minor pilfering.
He says: “A key role of government is to create an environment to encourage savers to make provision for their old age. Savers are quite frankly fed up with the uncertainty and constant changes to the rules and regulations.”