Industry warns of 'pensions raid' to fund IHT reduction
The pensions industry has warned that tax relief cuts announced today will deter people from saving into a pension and make the tax system even more complex.
The chancellor confirmed today in his Summer Budget that cuts will be made to tax relief that high earners can claim on pension contributions in order to fund an increase in the inheritance tax threshold. Tax relief will be restricted for those earning more than £150,000.
Intelligent Pensions marketing director Andrew Pennie said that "raiding pensions is the wrong approach" and added: "Pensions have been through so many changes in recent years, we now need a need a period of consistency, instead of constantly chopping at the tax advantages.
"The worry is this slicing of tax relief is merely the first step. Once this barrier has been hurdled, future governments will feel less compunction in making further hacks at tax relief, eroding it still further and further.
"It makes sense that the very highest earners take a good look at their pension savings and consider whether they want to pay any further pension contribution before April 2016 to get the full tax relief, especially if they have benefits well below £1.25m which can then be protected against the reduction to the lifetime allowance."
Annual allowances for savings will be tiered on earnings between £150,000 and £210,000, with those earning £210,000 seeing their annual allowance cut from £40,000 to £10,000.
PwC pensions partner Peter McDonald warned this will make the complicated pensions tax system "even more complicated".
He added: "An ad-hoc change just disengages business leaders from the role of pensions in their organisations. Senior employees may now not bother saving into pensions. It sends a mixed message into society. Auto-enrolment is about engaging the shop floor and lower earners in pensions, but by disengaging bosses it feels that people are no longer all in this together.
"This creates a level of uncertainty and complexity for people earning around £120,000 or more a year, and could see a rush of these people coming out of salary sacrifice arrangements as they won't know if they have breached the tax limit until the end of the tax year. We would encourage employers to undertake a review of their pensions salary sacrifice to understand who will be impacted by this dramatic change."
Towers Watson was concerned the policy will lead to penal marginal tax rates for high earners, particularly if they choose to save the money they get from a pay rise in a pension.
Senior consultant Stephen Green said: "If someone with an income on the taper is saving up to the limit, they will pay £675 in tax for each £1,000 of additional income unless they cut back their pension contributions at the same time.
"It gets worse if they want to save their extra income in a pension; if you include the tax due in retirement, they could eventually lose £975 of their £1,000 pay rise to the taxman! In extreme cases, the tax rate can even exceed 100%."
He said this policy will make it much harder for high earners to plan their pension saving.
"First, they won't know their income until the end of the year, so won't know how much they can save without incurring tax penalties. Second, cutting back on pension contributions to avoid penal rates of tax may not always be the right thing to do: it can mean losing matching contributions from the employer - though we expect that many employers will respond to this change by offering cash alternatives to affected staff."
"High-flyers will now have to do more of their pension saving before their earnings peak - that is, when they have less disposable income. For people who expect to be on big salaries in a few years' time, it could be now or never to save large sums in a pension.
He said this could stop some high earners to "stop saving in pensions altogether".
Inheritance tax
But the move to raise the inheritance tax was welcomed.
Bower Retirement Services chief corporate officer Andrea Rozario said the increased threshold will end a lot of "unnecessary confusion" about retirement planning with people "focusing on beating IHT at the expense of their own comfort in retirement".
He added: "Homeowners who are asset rich but cash poor should be concentrating on how best to ensure they maximise their income in retirement and property wealth should be part of the solution. Our advisers' experience is that increasingly customers are less concerned about leaving an inheritance as very often their children are more concerned with the quality of life of their parents in their remaining years rather than their own possible inheritance.
"The furore on IHT is slightly out of proportion - around one in 10 estates currently pay the tax which is not insignificant but is not the biggest issue in retirement."
There is concern that the new threshold will encourage people to stay in their homes in order to ensure as big an inheritance as possible. Rozario said: "That will not help the housing crisis in the country and nor is it necessarily the best use of their assets. Bigger houses need a lot of maintenance and funding that will be challenging from pension income alone."
JLT Employee Benefits chief actuary Hugh Nolan pointed out there are around half a million properties in the UK worth £1m. "This will disproportionately benefit those living in the South East, who have already made substantial tax free capital gains on these properties," he said.
Broadstone technical director David Brooks warned the desire to create goodwill with an inheritance tax hike has resulted in "more complication for the pensions industry".
He explained: "The creation of new Pension Input Periods and mini-tax years will be an administrative headache which will be tricky to explain to members and end up being cost neutral. George Osborne did well to avoid addressing the complication head on during his Budget speech."
The inheritance tax personal threshold has been pegged at £325,000 since 2009 with significant rises in the property market pushing many people into larger IHT bills.
Towry head of estate planning Ian Dyall said raising the threshold was therefore "excellent news" and added: "Even at the new eventual higher threshold of £1m, one in ten UK households are sitting on assets totaling at least that amount, but they could at least now see their inheritance tax bill greatly reduced. Inter-generational wealth transfer is key - given the increased challenges the younger generation will face to fund their own retirement, many will be relying on gifts made through their inheritance. Those people who already have plans in place for passing on their assets should now be reviewing these plans in the light of the changes, including potentially amending their wills."
Tim Humphries, associate director at tax advisers Menzies said it was important to read the small print. "The reality is that each individual is being given a £175,000 allowance on their main home. If they are married then the allowance can be transferred. The bit they didn't announce quite so loudly was that the Inheritance tax nil rate band for all other assets will be frozen until 2021 at £325,000. We haven't heard the term ‘Fiscal drag' for a long time but it may be time to bring it out again."
More on Law and Regulation
Why you must be proactive to address risks in the 'new normal'
Tim Shepherd and Beth Brown look at the legal implications of working from home and how pension professionals can mitigate the risks.
TPR posts sharp increase in use of frontline powers against schemes
The Pensions Regulator (TPR) has substantially increased the usage of its powers against trustees – posting a sharp rise in the use of formal information gathering powers and High Court production orders during the three months to the end of September....
Pension Schemes Bill passes final stages of the House of Commons
The Pension Schemes Bill has completed its third reading, crossing its latest hurdle in the House of Commons.
MPs vote down Pension Schemes Bill automatic guidance amendment
An amendment to the Pensions Schemes Bill which would have seen people given a pre-booked Pension Wise appointment ahead of accessing their retirement savings has been defeated.
Auto-guidance gets cross-party support; Labour calls for net-zero pensions
A proposal to ensure savers receive a Pension Wise appointment prior to accessing their retirement pot has received cross-party support in parliament, while Labour seeks net-zero pensions by 2050.
