The Treasury have recently published a discussion document on Restriction of Pension Tax Relief. As is often the case I have responded to this document and my response is below.
If you want to read the paper yourself it can be found at:
http://www.hm-treasury.gov.uk/d/consult_pensionsrelief_discussion.pdf
If you have any thoughts, please feel free to respond directly yourself.
If you want to read the paper yourself it can be found at:
http://www.hm-treasury.gov.uk/d/consult_pensionsrelief_discussion.pdf
If you have any thoughts, please feel free to respond directly yourself.
If you are one of my clients reading this please feel free to email me directly and I’ll pass on your response if you prefer.
Please remember in professional terms I remain apolitical. The current Government are in power and no political bias is intended in any of my comments.
The document starts with: “The Government announced in the June Budget that it is considering the reform of pensions tax relief. Having listened to the concerns of the pensions industry and employers, the Government has reservations about the approach adopted by the previous administration in Finance Act 2010 (April). It believes this approach could have unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness.”
I agree – since around 1998 the constant meddling and fiddling of pension legislation has, regrettably, not brought around the stated aim of ‘simplification’ but in my opinion, caused ‘complification’!
Pension tax relief has long been a large part of the subject. Almost without exception, as far back as I have been a financial adviser (1995), every time a budget was due the removal of higher rate tax relief has been mooted as something that would/could be lost. Not only does this cause general instability around pensions but sometimes leads to unnecessary ‘buy now while stocks last’ thoughts.
The paper continues: “The Government will seek to ensure that it raises at least the same amount of revenue through restricting pensions tax relief as has already been accounted for in the public finances from the Finance Act 2010 (April) measure over the forecast period, and beyond that in steady state.
Generous tax relief is available to encourage individuals to take responsibility for retirement planning and in recognition that pensions have been traditionally less flexible than other forms of saving. An incentive to save in a pension is also provided by the ability to take a tax-free lump sum worth 25 per cent of the fund and the possibility that individuals may be taxed on their pension in payment at a lower marginal rate than the rate at which relief was received when contributions were made.”
I am in agreement with this in that I have long held the opinion that pensions are at best a complicated beast, with much inherent inflexibility but for the most part and for most people (let’s leave the thorny and complicated matter of means tested benefits for low earners to another blog & time) the trade off for generous tax relief, especially for higher rate tax payers, is worth it.
Reading the remainder of the document there seems to be a genuine desire to be fair.
It is worth noting that at the time of writing, broadly speaking (and without getting into the minutiae of the many and varied rules) the annual allowance is £255,000 and the lifetime allowance (of which more later) is £1.8million (due to remain the case until 2015/16)
The proposals are to bring the annual allowance down to a figure somewhere around £30,000 - £45,000
This seems to me to be OK for most people, most of the time. Certainly I have many clients who have contributed over this amount in a given year but not year after year after year.
At this point I should also state my comments are related only really to ‘defined contribution’ schemes whereby the amount going into the pension is under discussion and usually made by my clients. I am not concerning myself with ‘defined contribution’ schemes, like the more traditional company sponsored ‘final salary’ schemes of old [which the more cynical may note, MPs and the civil service still retain for themselves…]
[response to point 9, from para 4.12]
Overall I am in favour of simplification and the avoidance of ‘loopholes’. One of these is the current ability to have a ‘pension input period’ in which contributions are counted towards the annual allowance, but this can be completely different from the tax year, or the scheme anniversary year or the calendar year – leading to ‘clever’ manipulation of dates meaning more can be invested than the basic allowance. So in the aim of fairness, I would be all for just one input period for calculating the annual allowance, that being aligned with the tax year.
I noticed that nowhere in the document does the Government “welcome views on the annual allowance” although most other aspects of the proposal views are requested.
I’m going to give mine anyway…
If the figure of £30k-£45k has been calculated as appropriate by the powers that be (and I’m being perhaps generous here, given some of the previous pension legislation it could well just be a finger in the air amount!), then I would settle for a figure of £40,800.
Why £40,800?
Well, at the same time, I’d increase the ISA allowance to the same amount (again, this is a frightening bit of joined up thinking here, linking more than one matter to another, so I can’t imagine it will ever be considered by the powers that be…)
This would mean a figure of £81,600 in total for an individual to save into two differing but tax efficient vehicles over the course of a 12 month tax year – more than enough for most people and for those where it isn’t enough there are plenty of other clever planning things to do anyway.
So for most people until they are saving £80k+ a year (nearly £7,000 per month equivalent) there is no need to get complicated which should mean less consumers being ‘ripped off’ by banks et al ‘flogging policies’ that make them more money than the consumer. (we already have rules that set out guidelines for decent costs etc on ISAs and pensions – stakeholder type stuff for those in the know)
By having a figure of £40,000 (ish) and assuming someone works for 40 years , this means a total of £1.6 million going in to pensions over a lifetime, which is less than the current lifetime allowance (LTA) of £1.8 million so no extra cost to the treasury there.
Before moving to the LTA, one more thing on the annual amount. [response to point 7, from para 2.27]
Why not simply have this as the total gross (after tax relief) amount per year that can be saved.
Tax relief would be granted at the rate of the individual (so 20% for 20% tax payers, 40% for 40%, and x% if tax rates change in future). That way an individual can make a decision today based on their tax rate today. It is nigh on impossible to forecast what tax rates might be on retirement so almost futile to try to second guess. But whatever they might be in future does not change the absolute benefit of tax relief today.
If a company contributes on behalf of someone, that is gross anyway, so the £40,800 should just be a flat entry amount.
Moving to the Lifetime Allowance (LTA)
[response to point 6, from para 2.25]
I realise this may be more complex for defined benefit schemes but for defined contribution (which is where my experience is) why not just scrap the lifetime allowance as currently defined.
If there were to be an annual allowance (of say £40k) and someone contributes this for 40 years (to a total of £1.6m) as things stand now, if they get more than £200k fund growth they would be penalised!
Surely fund growth should be the reward to the client. As long as the contributions have not changed over the £1.6m allowing people to keep their fund growth costs the treasury nothing. Indeed it could be argued it helps the individual (who has more money), the economy (because they can spend it) and therefore society in general. Surely the increased tax take on the income tax as the increased pension is paid, and the increased tax take on the spending of those monies is fairer (if not better) than taxing someone on the gains they made having taken the ‘risk’ they wanted.
Please remember in professional terms I remain apolitical. The current Government are in power and no political bias is intended in any of my comments.
The document starts with: “The Government announced in the June Budget that it is considering the reform of pensions tax relief. Having listened to the concerns of the pensions industry and employers, the Government has reservations about the approach adopted by the previous administration in Finance Act 2010 (April). It believes this approach could have unwelcome consequences for pension saving, bring significant complexity to the tax system, and damage UK business and competitiveness.”
I agree – since around 1998 the constant meddling and fiddling of pension legislation has, regrettably, not brought around the stated aim of ‘simplification’ but in my opinion, caused ‘complification’!
Pension tax relief has long been a large part of the subject. Almost without exception, as far back as I have been a financial adviser (1995), every time a budget was due the removal of higher rate tax relief has been mooted as something that would/could be lost. Not only does this cause general instability around pensions but sometimes leads to unnecessary ‘buy now while stocks last’ thoughts.
The paper continues: “The Government will seek to ensure that it raises at least the same amount of revenue through restricting pensions tax relief as has already been accounted for in the public finances from the Finance Act 2010 (April) measure over the forecast period, and beyond that in steady state.
Generous tax relief is available to encourage individuals to take responsibility for retirement planning and in recognition that pensions have been traditionally less flexible than other forms of saving. An incentive to save in a pension is also provided by the ability to take a tax-free lump sum worth 25 per cent of the fund and the possibility that individuals may be taxed on their pension in payment at a lower marginal rate than the rate at which relief was received when contributions were made.”
I am in agreement with this in that I have long held the opinion that pensions are at best a complicated beast, with much inherent inflexibility but for the most part and for most people (let’s leave the thorny and complicated matter of means tested benefits for low earners to another blog & time) the trade off for generous tax relief, especially for higher rate tax payers, is worth it.
Reading the remainder of the document there seems to be a genuine desire to be fair.
It is worth noting that at the time of writing, broadly speaking (and without getting into the minutiae of the many and varied rules) the annual allowance is £255,000 and the lifetime allowance (of which more later) is £1.8million (due to remain the case until 2015/16)
The proposals are to bring the annual allowance down to a figure somewhere around £30,000 - £45,000
This seems to me to be OK for most people, most of the time. Certainly I have many clients who have contributed over this amount in a given year but not year after year after year.
At this point I should also state my comments are related only really to ‘defined contribution’ schemes whereby the amount going into the pension is under discussion and usually made by my clients. I am not concerning myself with ‘defined contribution’ schemes, like the more traditional company sponsored ‘final salary’ schemes of old [which the more cynical may note, MPs and the civil service still retain for themselves…]
[response to point 9, from para 4.12]
Overall I am in favour of simplification and the avoidance of ‘loopholes’. One of these is the current ability to have a ‘pension input period’ in which contributions are counted towards the annual allowance, but this can be completely different from the tax year, or the scheme anniversary year or the calendar year – leading to ‘clever’ manipulation of dates meaning more can be invested than the basic allowance. So in the aim of fairness, I would be all for just one input period for calculating the annual allowance, that being aligned with the tax year.
I noticed that nowhere in the document does the Government “welcome views on the annual allowance” although most other aspects of the proposal views are requested.
I’m going to give mine anyway…
If the figure of £30k-£45k has been calculated as appropriate by the powers that be (and I’m being perhaps generous here, given some of the previous pension legislation it could well just be a finger in the air amount!), then I would settle for a figure of £40,800.
Why £40,800?
Well, at the same time, I’d increase the ISA allowance to the same amount (again, this is a frightening bit of joined up thinking here, linking more than one matter to another, so I can’t imagine it will ever be considered by the powers that be…)
This would mean a figure of £81,600 in total for an individual to save into two differing but tax efficient vehicles over the course of a 12 month tax year – more than enough for most people and for those where it isn’t enough there are plenty of other clever planning things to do anyway.
So for most people until they are saving £80k+ a year (nearly £7,000 per month equivalent) there is no need to get complicated which should mean less consumers being ‘ripped off’ by banks et al ‘flogging policies’ that make them more money than the consumer. (we already have rules that set out guidelines for decent costs etc on ISAs and pensions – stakeholder type stuff for those in the know)
By having a figure of £40,000 (ish) and assuming someone works for 40 years , this means a total of £1.6 million going in to pensions over a lifetime, which is less than the current lifetime allowance (LTA) of £1.8 million so no extra cost to the treasury there.
Before moving to the LTA, one more thing on the annual amount. [response to point 7, from para 2.27]
Why not simply have this as the total gross (after tax relief) amount per year that can be saved.
Tax relief would be granted at the rate of the individual (so 20% for 20% tax payers, 40% for 40%, and x% if tax rates change in future). That way an individual can make a decision today based on their tax rate today. It is nigh on impossible to forecast what tax rates might be on retirement so almost futile to try to second guess. But whatever they might be in future does not change the absolute benefit of tax relief today.
If a company contributes on behalf of someone, that is gross anyway, so the £40,800 should just be a flat entry amount.
Moving to the Lifetime Allowance (LTA)
[response to point 6, from para 2.25]
I realise this may be more complex for defined benefit schemes but for defined contribution (which is where my experience is) why not just scrap the lifetime allowance as currently defined.
If there were to be an annual allowance (of say £40k) and someone contributes this for 40 years (to a total of £1.6m) as things stand now, if they get more than £200k fund growth they would be penalised!
Surely fund growth should be the reward to the client. As long as the contributions have not changed over the £1.6m allowing people to keep their fund growth costs the treasury nothing. Indeed it could be argued it helps the individual (who has more money), the economy (because they can spend it) and therefore society in general. Surely the increased tax take on the income tax as the increased pension is paid, and the increased tax take on the spending of those monies is fairer (if not better) than taxing someone on the gains they made having taken the ‘risk’ they wanted.
At current rates you'd need someone working for longer than 44 years before they could have contributed over the current LTA - and frankly, after working for 44 years + you deserve a break!
It seems churlish to penalise people for overstepping the allowances. I am not suggesting it should be beneficial , just neutral. So if someone does invest more than is allowable in a year (in our experience inadvertently when earnings change / fluctuate rather than anything machiavellian) rather than levy a penalty meaning they are worse off, just tax them back to neural. Again, surely fairer?
[response to point 10 & 11, from para 4.20 & 4.22]
It has been my experience that most of my clients, with regard to pensions and to a degree any type of long term investment have relatively simple needs as regards information.
How much do I have
How much did I put in
When did I do it / How is it doing
And with pensions, what will that give me.
For the most part, the over regulation of financial services paperwork has lead to utterly unintelligible annual statements that I as a professional find hard to interpret, let alone ‘the man on the Clapham omnibus’ who just wishes to have simple answers to the simple questions above and to be reassured of a few things; that he is doing the right thing and that he will be OK down the line – and if not, what to do about it.
Surely it can’t be beyond the wit and remit of Govt and pension providers to generate a simple statement, showing what the pension is worth in today’s money, how much of that came from varying sources (individual, company, tax relief, etc) with the remainder then being investment growth (or loss). Add in the total charges taken to date for complete clarity and the individual know knows what they have and where it came from.
Finally, an indicative figure showing what the current total could provide (in today’s money) using today’s interest rates with a simple wealth warning saying that as all manner of factors change over time it is important to review this, either with a professional (who then takes responsibility for the numbers) or on your own, in which case caveat emptor.
Summary
I am encouraged that the current proposals are aiming for both fairness and simplicity and I hope that is the outcome, but I worry that as has happened before, the proposals become needlessly complex and will further frustrate, disenfranchise and lead to apathy in the UK pension saving population (in which I count myself)
Overall I yearn for a system that actually incentivises and rewards the UK pension saver. PLEASE Don’t disappoint me HM Treasury…
It seems churlish to penalise people for overstepping the allowances. I am not suggesting it should be beneficial , just neutral. So if someone does invest more than is allowable in a year (in our experience inadvertently when earnings change / fluctuate rather than anything machiavellian) rather than levy a penalty meaning they are worse off, just tax them back to neural. Again, surely fairer?
[response to point 10 & 11, from para 4.20 & 4.22]
It has been my experience that most of my clients, with regard to pensions and to a degree any type of long term investment have relatively simple needs as regards information.
How much do I have
How much did I put in
When did I do it / How is it doing
And with pensions, what will that give me.
For the most part, the over regulation of financial services paperwork has lead to utterly unintelligible annual statements that I as a professional find hard to interpret, let alone ‘the man on the Clapham omnibus’ who just wishes to have simple answers to the simple questions above and to be reassured of a few things; that he is doing the right thing and that he will be OK down the line – and if not, what to do about it.
Surely it can’t be beyond the wit and remit of Govt and pension providers to generate a simple statement, showing what the pension is worth in today’s money, how much of that came from varying sources (individual, company, tax relief, etc) with the remainder then being investment growth (or loss). Add in the total charges taken to date for complete clarity and the individual know knows what they have and where it came from.
Finally, an indicative figure showing what the current total could provide (in today’s money) using today’s interest rates with a simple wealth warning saying that as all manner of factors change over time it is important to review this, either with a professional (who then takes responsibility for the numbers) or on your own, in which case caveat emptor.
Summary
I am encouraged that the current proposals are aiming for both fairness and simplicity and I hope that is the outcome, but I worry that as has happened before, the proposals become needlessly complex and will further frustrate, disenfranchise and lead to apathy in the UK pension saving population (in which I count myself)
Overall I yearn for a system that actually incentivises and rewards the UK pension saver. PLEASE Don’t disappoint me HM Treasury…
