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Steve Webb defends tax relief reforms despite DB complexity

Pensions minister Steve Webb insists his proposal to introduce a flat-rate of tax relief is workable despite industry experts questioning how the reform would be implemented for defined-benefit schemes.

In an interview with Money Marketing last week, the Liberal Democrat MP said he is pushing his coalition colleagues – as well as his own party – to pursue bold tax relief reforms.

He said the current system is “skewed towards higher earners” and proposed an alternative whereby everyone would receive the same rate of tax relief, set between 20 per cent and 30 per cent.

However, a paper published by the Pensions Policy Institute last year warned it would be “difficult” to implement a single rate of pensions tax relief for DB schemes. This is because employer and employee contributions are paid into a common fund rather than into individual member accounts. A single rate would require the employer to calculate the deemed contribution for a larger number of employees. 

Towers Watson senior consultant David Robbins says: “If the Government decides to follow through with this, there is a risk that it could get very messy.

“If you are in a DB scheme, the value of contributions the employer is paying is not supposed to reflect the value of accrual to the member. It is an average across the membership.

“If the Government decides to press ahead with a ban on DB-to-DC transfers, you might start thinking about separate tax regimes for DB and DC to overcome these difficulties.”

Rowley Turton director Scott Gallacher says: “This would be incredibly complicated to implement for both DB and DC schemes. Adjusting employee contributions should be relatively straightforward but it is not clear how it would work from an employer perspective.”

Webb acknowledged that his proposals would not be straightforward to implement but he said: “About a third of all tax relief is delivered by people paying out of their net pay and then HMRC writes a cheque to top it up. That is how Nest does tax relief, for example.

“That could apply to DB as well. Schemes would have to juggle their contribution rates or accrual rates to offset that but I think it is doable.”

Webb also suggested that similar changes would need to be brought in for employers to prevent people using salary sacrifice to lower their pensions tax bill.

He said: “Clearly, you do not want a flat rate of relief on the employee side, everyone shovelling contributions through the employer and suddenly getting 40 per cent again.

“So you would have to have an equivalent matching measure for the employer side.

“There are complexities that would have to be addressed and there is no point pretending that is not the case. We need to redress the balance of tax relief and having looked at it, there is a lot to be said for more radical reform than is our current policy. But I have to persuade my own party first.”

Webb’s tax relief reform proposal – the DB problem explained

In a defined benefit scheme, contributions are paid by the employer and employee into a common fund, which is invested to provide all retirement benefits.

The deemed contribution is an estimate of the increase in the individual’s defined benefit pension entitlement in the previous year. In the current system, unless there is a risk of the deemed contribution for an individual exceeding the annual allowance, the deemed contribution is not calculated.

A single rate would require the employer to calculate the deemed contribution for a larger number of employees.

As the deemed contribution is based on the increase in value of the fund, the deemed contribution and the extra tax may not bear any resemblance to the employer’s and employee’s contributions made on behalf of that employee.

As such, this system may not appear transparent to pension savers, and could reduce the attractiveness of pension saving to employers and employees if they face higher income tax payments and more complexity.

Source: The Pensions Policy Institute

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. I had one of Steve Webbs ” common Funds” run by Scottish Widows Retirement Benefits Trustees (SWRBS ) who make up the Rules as they go along to suit themselves and cross subsidise executives pension pots – at the financial loss to the employees ( E.G Mike DRoss walked of with some £ 4 Million of a pension pot – whilst the Managing Trustees ( the Board of Directors ) manipulate the cash equivalent – with their colleagues in Aegon . . .who assist I this pension swindle. . . . . .Steve Webbs double taxation ( IE National Insurance contribution, and paying into an insolvent Government State Pension Scheme arrangement and being Forced to contribute to an auto -enrolment pension – whilst tax increases benefits decrease under David Cameron and Steve Webb . . . . . Compulsory Peoples pensions . . .for the paupers and working middle classes – the rich can afford Advice.

  2. David Stoddart 22nd May 2014 at 4:48 pm

    I am missing something here? Would the flat rate of tax relief not just be in relation to any personal contribution that is required towards a DB scheme e.g. If the DB scheme requires an employee to contribute 6% of their salary then surely this could simply be subject to the flat rate.

    I am assuming that Steve Webb is only talking about personal contributions as employer contributions receive corporation tax relief which will eventually only be 20% for all companies (if a Ltd Company).

    And I don’t think it would be hard to calculate at all.

  3. “….it could get very messy……”

    Ah….so……grasshopper…….since when did that ever stop HMG pressing on with anything!

  4. @David Stoddart: I think that you may be missing something here. The point is that with a DB scheme the employer can always reduce the employees’ contribution to zero, with the employer bearing all the costs. In return it would pay the members less. This is what Webb was referring to by the ‘salary sacrifice’ remark.

    But perhaps more important is what Mr Webb appears to be missing (carrying on the tradtion of pensions ministers and Chancellors before him): If you make pensions relatively unattractive to high earners, then you making them less interesting to every corporate decision-maker. So noone should be surprised as the consensus continues to shift from ‘we need to look after our people by providing worthwhile pensions’ to ‘cash is king!’

    I suspect that the more clued-up corporate advisers have been conscious of this for many years – ever since the earnings cap was introduced. But everyone is too afraid to admit in public that anyone goes to the lavatory – more precisely: that corporate decisions are made by paragons who put all personal consideratiosn aside and act completely robotically.

    Understandable to want to avoid airing an unpalatable truth perhaps. But it the message does not get across to the politicos, then in pension terms there is only one way forward – a race to the bottom.

    What about employing some of this energy on finding a way to link the pension provision that a company’s execs can get for themselves to those that must be provided to the rank and file employees? Create a tide that raises all ships?

    Rant over.

  5. Julian Stevens 22nd May 2014 at 7:17 pm

    This nutter should be strapped into a strait jacket and locked away in a padded cell.

  6. Steve Barrett 23rd May 2014 at 1:37 pm

    A very appropriate picture – he appears to be demonstrating the size of his brain.

  7. It is always difficult when you have the Incompetent leading the incontinent . .which is one reason for the Restrictive Trade Practices by HM Government heaped destruction by RDR – upon Independent Financial Advisers and Independent Financial Advisers practices – to permit the tardy trading and selling of compulsory pension – on the weak, on the most vulnerable people in society – the young, the graduates – who have the greatest difficulty on getting any job – after paying for their education. This is daylight robbery – authorised by David Cameron under his communist comrade Steve Webb. Forced pension contribution – the tax on employers ( by increased wages ) and increased pensions savings ( a double tax including National Insurance and now Auto Enrolment ) . No wonder nobody has any confidence in such a wayward pension scheme. Built by a bankrupt government – to increase the tax on the middle classes – the elderly and the vulnerable . . . . Now that is Conservatives at Work !

  8. Julian Stevens 27th May 2014 at 9:55 am

    Apart from anything else, is this latest barmy proposal based on any sort of Cost:Benefit Analysis? We know that there are far more basic than higher rate basic tax payers so granting people in the former category tax relief at higher than their marginal rate won’t be balanced out by granting those in the latter category less than their marginal rate. Thus, there’ll be a cost to the central exchequer. Have any (credible) estimates been made as to:-

    1. the quantum of this imbalance (the Cost) and

    2. how many basic rate tax payers will, as a result, increase their pension contributions or, for those who are presently making no pension contributions, how many will now start to do so and at what level as a percentage of their earnings?

    Has even a street poll been commissioned and undertaken, based on just two questions?

    To higher rate tax payers: If tax relief were to be cut to between 25 and 30%, would you maintain, increase or reduce your current level of pension contributions?

    To basic rate tax payers: If tax relief were to be raised to between 25 and 30%, would you start making contributions to a pension plan, leave your current level of contributions unchanged or increase them?

    I have no idea what HRTP’s might say but my guess would be that, because all confidence in the pensions system is so shot to pieces, BRTP’s might well say they’d make no changes. So what would be achieved? Without such data, how can this latest idea be regarded as anything other than just another unresearched and therefore groundless politician’s hunch?

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