We are getting very used to the Chancellor pulling pension rabbits out of his Budget box. This time around it was in the specialist subject area of pension input periods and the prospect for tax relief reform.
Without any sense of irony, George Osborne’s foreword to the green paper says: “It has been over a decade since the Government last reviewed the support on offer through the tax system for those saving into a pension”. I guess in a world where a week is a long time, 10 years must seem like a lifetime. For many of us, though, it still feels like yesterday.
The PIP changes are welcome. In an industry often accused of making things complicated the rules are the smoking gun. From 6 April 2016, all PIPs will be aligned with the tax year, which will make it much easier to work out how much clients have in terms of annual allowance, as well as knowing when payments have to be made by.
The real Georgie bonus, however, is that to harmonise PIPs we get a double allowance for the period up to 6 April. In effect, everybody gets an allowance equal to what they paid in before 8 July plus another allowance of £40,000 to run from now to the end of this tax year. If one has already paid in more than £40,000 this can be offset against the additional allowance. For some, this gives an annual allowance of up to £80,000.
Those of us who told clients to maximise contributions before the Budget in case higher rate relief was removed immediately will be rightly feeling smug. Clients who acted on this advice now have another bite of the cherry. Even better, higher rate relief remains untouched for now, giving a last chance for some to get the most from the change.
But what George giveth he also taketh away. Disappointingly, the Government has stuck to its manifesto pledge of reducing tax relief for high earners on a taper basis. We all understand financially and politically something needed to be done but, by linking the annual allowance to income levels, we are making retirement planning for high earners fiendishly complex.
As well as restricting the ability of this group to save in a pension going forward, in some cases the indexation of past service defined benefits will already exceed the reduced annual allowance. This may provide further impetus for these clients to look at cashing in DB benefits.
It is easy to jump to immediate solutions but we believe the real issue is around how to create a coherent policy to encourage higher levels of retirement saving. Any initiative would need to be judged against four key criteria, namely: it is inclusive of all workers, provides a clear incentive to save, can be implemented with minimal disruption and is sustainable for the long term.
First and foremost, we need to properly assess the impact on people’s propensity to save and not engage in any knee-jerk overhaul of pension tax in the short-term.
Richard Parkin is head of retirement at Fidelity Worldwide Investment