Wed 09 Mar 2016

"Oh, pension hokey cokey, oh pension hokey cokey"

I feel quite dizzy!

Back in July 2015 the Chancellor announced a consultation on potential changes to pension tax relief.  In more recent months it seemed clear that a move to a flat rate of tax relief was being considered and this would have been a relatively simple route to reducing the overall cost of this relief as well as rebalancing it towards lower income savers who need greater incentive to save.

As a result, we have been amongst a group of advisers suggesting that higher and additional rate taxpayers consider making additional contributions now, or at least pulling forward future pension contributions, to ensure they receive the current "generous" rate of tax relief.  Estimates suggest that many have taken such action, with these incremental contributions estimated to have attracted an additional £1.5bn of tax relief.

Then last Friday, seemingly well briefed media sources were suggesting the Chancellor's preference was now for the so called "Pension ISA".  This caused much consternation as it is a more radical change from the current system, and one with many risks.  The removal of upfront tax relief on contributions, even if partly replaced by a state "top-up", would be a controversial overhaul in the middle of the roll out of auto-enrolment (the compulsion for all employers to provide a pension for their staff).  And whilst allowing tax free withdrawals looks initially attractive, it hides the fact that the "tax free lump sum" benefit would effectively be lost, and also requires a leap of faith that future governments won't change the rules and look to tax this "tax free" income.  It also, at the stroke of a pen, produces significant short term tax savings for the Treasury.  However, this is at the expense of removing future tax revenues (on future pension income withdrawals) that would be valued by Chancellors in 20, 30, 40 years time who face a steady increase in the number of pensioners per working adult.

A mere 24 hours later, on Saturday morning when I sat down to my toast and marmalade, I was confronted by headlines saying "Osborne scraps pension tax relief shake-up".  A co-ordinated press briefing on the Friday night had taken place where it had been "announced" that there will be no change to pension tax relief in the Budget on the 16th March.

Why this change of heart?  Official sources have cited not wanting to disrupt the introduction of auto-enrolment, though there has been much talk of a back-bench mutiny within the Conservative ranks if any policy change adversely impacts their voters, as well as extreme nervousness at introducing an internally controversial policy in the run up to the EU referendum.

People need clarity and confidence if they are to put money into their pension and that is not helped by "consultation by media" and the impression that pension policy is more focussed on short term tax generation and political expediency.

What happens next?  The Chancellor has only delayed the outcome of the consultation until after this month's Budget, and presumably after the June referendum.  However, we still expect change to come in the future, and the introduction of a flat rate of relief is still the most likely option.  We still believe that tax relief of 40% and 45% is a finite resource.

That doesn't mean that the Budget will be without interest for us pension obsessives.  We may still see changes such as a further reduction in the Annual Allowance or Lifetime Allowance, or even an attack on salary sacrifice arrangements.  Of the £50bn cost of pension tax relief, £15bn is in the form of National Insurance relief on employer contributions, and £21bn is income tax relief on employer contributions.  These are significant numbers in the context of an annual budget deficit of £70bn.

So, we await the Budget, and in the mean time continue to prepare our clients for the already announced changes that start on the 6th of April.

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