Keeping an open mind – I hope they do!
The consultation on the Green Paper “Strengthening the incentive to save – a consultation on pension tax relief”. closed on 30 September. At only 23 pages it is an interesting though fairly light read but whatever comes out of the consultation it could radically impact on saving for retirement. It may be I am just becoming more cynical in my old age, for despite HM Treasury’s assurance that it is keeping an open mind as to the outcome of the consultation, part of me feels that a lot of the decisions may have already been made.
There is no doubt that a key driver for change is the overall tax loss to HM Treasury of pension funding and the ‘cash flow’ issue this creates for the Country. HM Treasury has stated that the loss in income tax and NICs receipts is in the region of £50bn a year, and that furthermore, two thirds of these tax savings go to higher and additional rate taxpayers. The inference is this is unfair, which in simplistic terms is difficult to deny, but with recent reductions in the annual allowance, the proposed introduction of the tapered annual allowance and reduction in the lifetime allowance to £1m, these will significantly limit the ‘tax breaks’ for high earners, the full impact of which will be seen over the next few years.
Another inference is that it is the complexity of the current tax regime that is putting individuals off contributing to pensions. The reality is more likely to be affordability, apathy and a general distrust of pensions, the latter aided and abetted by near constant government tinkering. How big a priority is saving into a pension for those trying to build a deposit to buy a property, pay off a student loan, or raise a family? If we want to encourage everyone to save, then there is a choice to be made as to whether it is the carrot or stick approach that is needed.
If the chosen option is to incentivise people to save, then tax relief at outset satisfies this, though a more equitable approach may be justified. There has been much discussion in the past of introducing a flat rate of, say, 30%. This would give added incentive to basic rate taxpayers and perhaps still be attractive to higher rate taxpayers. Control of the cost of such an arrangement could still be managed through the annual allowance.
On its own it appears a fair and workable solution, certainly for defined contribution schemes, but for defined benefit schemes is it likely to add further complexity?
If tax relief is no longer available at the member’s marginal rate, then one would have thought that any employer contribution not covered by the flat rate should be taxable as a benefit in kind. Where it is a defined benefit scheme the employer contribution may not reflect the true cost of the benefit accrued and so things become even more complex.
If dangling the carrot doesn’t work then the alternative is the stick. Making saving for retirement compulsory may not be popular but with auto enrolment well established, it might not be as difficult to introduce as people imagine.
One hopes the HM Treasury does keep an open mind and works closely with the pension industry to find a viable solution that is fair to all. For our part, we’ll be making sure we beat the drum for pensions as they’re not broke, so don’t need fixing. Their benefits just need to be better explained.
This blog first appeared in Sipps Professional.