As we look forward to the second Budget later today, PP flags up the main measures that could affect the pension system.
Changes to tax relief for high earners featured in the Conservative manifesto, while salary sacrifice is reported to be in the Chancellor's sights as he looks for ways to raise revenue. Elsewhere, keep your eyes peeled for news on the secondary annuity market and state pension age.
It's on the table again. Despite the howls of protest from the industry ever time the subject is broached, tax relief cuts are still likely. The measure outlined in the Conservative manifesto was targeted at the highest earners. It involved workers losing 50p of annual allowance for every extra pound earned between £150,000 and £210,000, meaning somebody at the top end of this income range would have an annual allowance of £10,000.
Reviewing the pledge ahead of the election, the Institute for Fiscal Studies said it was unclear why someone earning £150,000 should be able to receive income tax relief on £40,000 of pension saving while someone earning £250,000 should only be able to receive relief on £10,000 of pension saving.
It added that, while only affecting only 300,000 people - about 0.66% of the adult population - the measure would further complicate the tax relief system.
The think tank also questioned whether the proposal would raise the £1.4bn the party expected, pointing out that if it results in people spending income now rather than in the future, it would bring forward tax receipts, rather than necessarily increasing them.
So could the government go for a more radical overhaul? It's certainly possible, and a briefing paper on pensions tax relief was published on parliament's website late last week.
A complete overhaul would be more palatable for many in the industry, with the Association of Consulting Actuaries among the organisations calling for a fundamental review.
Hargreaves Lansdown head of pensions research Tom McPhail says: "The UK's pension system is still very much a work in progress and with so many radical changes already underway, further reform is inevitable.
"For the sake of all investors, young and old, modest or wealthy, we would like to see a system of pension taxation which encourages saving and investing and which rewards people for taking responsibility for their own retirement. We need to see a stable, long-term settlement which helps the UK to build good levels of retirement savings."
"Our great concern is that the government will simply cap tax breaks for higher earners. This would do nothing for the vast majority of the population except make the pension system marginally more complicated than it already is."
McPhail highlighted six issues with the current system:
• Higher earners get most of the tax relief, yet arguably need it the least. It is important to note though, that they also pay most of the income tax in the first place
• Since the pension freedoms, tax relief is granted on savings which can now simply be withdrawn and spent from age 55
• The Lifetime Allowance (LTA) is set to reduce to £1m, a level which is now inhibiting many from retirement saving
• The LTA is also assessed more beneficially for final salary scheme members than for money purchase investors
• Even with the pension recycling rules and the Money Purchase Annual Allowance, for over 55s it is possible to ‘game' the tax relief system
• The tax free lump sum has no logic to it, however it is also hugely popular and would be difficult to abolish
But in a climate of ongoing belt tightening, would the government consider an overhaul of taxation without increasing revenues to the Treasury? If the Chancellor goes for a bold move like a flat rate of relief, expect it to be somewhere below the 30% that would be broadly revenue neutral.
Closely related to tax relief, and maybe an even more tempting target is the salary sacrifice regime and former pensions minister Steve Webb said he would be "very surprised" if Treasury was not already working on that prospect. When combined with employer National Insurance reliefs, this could raise around £15bn, and given that the government has tied its hands in many areas with its proposed ‘tax lock', must look pretty attractive.
But the move would not go down well with employers and workers who use salary sacrifice arrangements, or the pensions industry. A poll carried out by PP found just 37% of pension professionals and trustees supported the idea. But the Chancellor has some political capital burning a hole in his red case and five years until the next general election.
City Noble associate Gavin Moffatt says: "While salary sacrifice is always touted as a potential target in any Budget, this time the Chancellor might actually do something about it. If he decides to progress further, in our view any workable attempt would mean not making employer pension contributions in general subject to NI, which would be extremely contentious, but to attack the act of sacrifice itself.
"This would mean setting down a definition in law and treating amounts sacrificed as earned income. Needless to say it would be hideously complicated, and with everything else to contend with let's hope salary sacrifice survives another year."
Hideously complicated? Sounds like a job for Towers Watson's David Robbins, who has come up with this summary of the key issues:
"People often talk about ending salary sacrifice without saying what they mean. The most dramatic policy would be to start applying employer and employee NICs to all employer pension contributions. That would raise a lot of money but would mean significant cuts to take-home pay - especially for basic rate taxpayers (examples in the paper) - and would increase what George Osborne calls ‘the jobs tax'.
"In theory, employer contributions could remain NIC-free, with people prevented from exchanging salary for higher employer pension contributions. But that creates anomalies - a £45k salary plus £5k employer pension contribution package would be fine if that was what the employee started off with but not if they began with a straight £50k salary and swapped £5k of it for an employer pension contribution. And it's hard to see how they could stop people negotiating pay packages more skewed towards pensions when they start a new job.
"Increasing National Insurance by extending its scope would go against the spirit, though not the letter, of the proposed ‘tax lock' legislation. And using the revenue to plug the deficit (rather than to fund other tax cuts) is not consistent with the Conservatives' stated fiscal consolidation strategy."
So Robbins reckons this won't be in today's speech, but points out that if the more radical option of merging income tax and NI comes up, the whole debate may be moot.
With many commentators predicting the most radical Budget in a generation there is scope for a whole warren-load of rabbits to be pulled from Osborne's hat. More detail on a secondary annuity market is not unlikely. Although many in the industry think letting people cash in annuities would be unworkable or unwelcome, word is the Treasury has already mentally spent the money it would raise, and new pensions minister Baroness Ros Altmann is a big fan of the idea.
And finally there's state pension age. Altmann has confirmed plans to increase it will be reviewed in 2017, looking at longevity and other factors such as gender, occupation and social factors. But could the Chancellor be tempted to accelerate increases to save money? Even with five years to go to the next election that one might be a bit too unpalatable for the electorate - so unless cross-party cover can be given, don't expect an announcement soon.
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