Since it was revealed that Fred the Shred’s pension was worth north of £17m, the issue of senior executive pensions has been much in the public eye. We have cottoned on to the Boardroom abuses that have allowed Remuneration committee’s to dish out obscene amounts of shareholder’s funds to their cronies and in as much as the worst abuses will now be the subject of punitive tax, the measures announced by the Treasury on Thursday are most welcome.
The adjustments the Treasury has made to their much trailed proposals have concentrated the impact of the new measures on the super pension rich who will now pay super pension taxes and this is a good thing.
What is not such a good thing is that the supposed £4bn pa saving to public funds is not justified by the measures taken.
There are two revenue raising measures. The capping of contributions to £50,000 pa known as the Annual allowance or AA and the capping of the maximum amount that can be drawn from a pension known as th Lifetime Allowance or LTA- this has been reduced to £1.5m.
The Treasury state that there only 100,000 people who contribute or have contributions on their behalf to their pensions in excess of £50,000 pa.
The Treasury say that they will only be raising £0.5bn pa from reducing the LTA.
We must assume they expect the changes to the AA to generate £3.5bn. They are proposing that above £50,000 contributions do not get marginal tax relief (eg the difference between the 20% rate and the individuals highest rate of tax – either 40 or 50%).
Even if we assume that the Treasury could recover 30% of these excess contributions (which won’t be the case as many of the contributors don’t pay the 50% super tax). They would have to see total contributions of 3.33 X £3.5bn to hit their revenue target. That’s over £11.6bn from a constituency of 100,000 people. It assumes that the average super rich pension contributor will be paying £116,000 above their £50,000 limit or £166,000 in total. As the Treasury know, the super-rich are super clever – this is not going to happen.
So where is the balance of the Treasury’s revenue forecasts going to come from. Not from the LTA according their numbers – are we missing something?
Well yes we are. Hidden in the Treasury’s report is the following statement.
The Government is minded to make no change and for the LTA valuation factor to remain at 20, but it will continue to monitor
this issue. (my italics)
That’s the Treasury’s get-out clause and you may think that the LTA valuation factor is a pretty obscure number – well it isn’t.
Put simply, the LTA valuation factor is the multiplier that converts the amount you get as a pension into a cash value.
For instance, your basic state pension pays you £5000pa. Using the LTA valuation factor it is worth £100,000.
But what if the Treasury was to use an LTA valuation factor of 23.6? Well your basic state pension would now be valued at 23.6 x £5000 or£118,000. Your pension wouldn’t be any bigger but it would be £18,000 more valuable.
So why did I chose 23.6 – is it a random number? Well no. Accompanying the Treasury Press Release and Report was a report from the Government Actuary which includes this;
Using the same assumptions as were used to derive the 16.1 factor recommended in the Report, the equivalent factor on retirement at age 60 (for the LTA) would be 23.6:1 and at 65 would be 22.1. That is, I am effectively assuming that pensions are more valuable than implied by the existing 20:1 Lifetime Allowance Factor, since I am assuming higher life expectancy and lower discount rates. In my opinion, this seems appropriate compared to the position 5 to 10 years ago when the previous factors were adopted.
Now the Government Actuary is no fly by night figure – he is in charge of a non Governmental Organisation that provides independent advice which is supposed to be authoritative.
The Treasury have simply ignored his recommendation.
They have chosen to ignore his advice that people are now living longer and that the forecast for long-term inflation and interest rates is lower than it was a few years ago.
Well not quite ignore – they have actually agreed with the Government Actuary when on these things with regards to annual allowance and ignore him with regard to the the Lifetime Allowance.
Now there’s nearly 20% more about 23.6 than 20 which means that the Treasury have the option – simply by adopting GAD’s recommendation to hike up the impact of the LTA by 20% which, given the fact that the baby-boomer generation is in the midst of retirement will hit a lot of the very rich – if not super-rich and might get the Treasury to their £4bn revenue saving.
I may not be bothered with regards to the amount of tax that the super-rich or even the very rich are paying but I am bothered that the Treasury can play fast and loose with the Government Actuary’s recommendations and with our understanding of the value of pensions.
Because if they behave like that with the rich, they can play like that with the poor and with “me” and I’m neither rich nor poor. It’s a matter of credibility – of integrity and of trust.
Related Articles
- Pension tax allowance: how the changes affect you (telegraph.co.uk)
- Number of Britons hit by tax raid higher than predicted (telegraph.co.uk)
- Changes Announced to Pensions Tax Relief [Christopher Wicks] (ecademy.com)
- What are the pension changes and how will they affect savers? (guardian.co.uk)
- Britain spared pensions tax pain (telegraph.co.uk)
- Pension tax relief to be cut (confused.com)
- Pensions tax relief to be curbed (bbc.co.uk)
- Tax relief on pensions to be restricted (newstatesman.com)
- You: Britain spared pensions tax pain – Telegraph.co.uk (news.google.com)
- Middle classes hit again with tax raid on pensions (telegraph.co.uk)
- Final-salary pension holders face ‘massive’ tax relief curb (guardian.co.uk)
- Widespread relief after measured pensions tax reforms unveiled (accountancyage.com)
- Pension tax benefits slashed for wealthy (independent.co.uk)
- Pension tax relief for most well off to be cut (libdemvoice.org)
- Letters: State subsidy to private pensions (guardian.co.uk)
Putting DB and DC under (supposedly) a single set of rules led to the LTA and the valuation factors. That didn’t seem to do either type of scheme a favour in my opinion.
For DC (my background) the LTA suddenly meant that you would not only be limited on what you put in, you’d be limited on what you could take out. It’s not quite heads the Treasury wins, tails you lose but if you’re taking on the investment risk, it seems wrong in principle that you could lose everything you put in if your investments are utterly disasterous but if your investments perform particularly well, you won’t necessarily get all the gain.
Moving off my home turf, it always seemed slightly ludicrous that a single valuation factor be used for the LTA as if it made no difference whether you retired at 50 (as the rules at the time still permitted) or 75; as if men and women have equal life expectancy, which I’m afraid we don’t; as if inflation and interest rates would remain at the level prevailing at the time, which they haven’t.
I’m probably being foolish and indulgent griping about what was put into legislation over 4 years ago but I’ve said it now.
I cannot understand why the valuation factor for the AA was changed but the one for the LTA was left alone. I suspect a further change in due course – spreading the bad news. This also seems to open the door to repeated future fiddling with the valuation factors – which is why I droned on above about what I perceive as the mistake of putting 2 fundamentally different types of scheme under a common set of rules.
I do pity George Osborne for having to grapple with Gordon Brown’s monumental mess – all the filthy skeleton’s in “Prudence’s” closet. But I don’t want to see him continue the previous government’s eyeing up of pensions as sources of revenue for the Treasury. If he’s going to cast his eye over pensions, it should be those for the public sector. “Fairness” and “equality” are popular words with all politicians: now they need to lay it on the line to the public sector just what that means in pension terms.
Good points SIPPHound- the LTA will have an impact on the investment planning of those with DC pots over £1m with a shift to lower risk assets, I’d be interested to see how many of the under 50s have got close to the £1m savings mark.
The holy grail for pension people is to get general engagement in “holistic” retirement planning and most people have a mix of DB and DC benefits (not forgetting we all have a DB benefit in the BSP and most of us some entitlement to S2P).
The argument for including DB and DC within the LTA is that it forces people to value their retirement provision holistically. Of course by “people” I mean those with £1m or more in accumulated benefits. If the Treasury had adopted GAD’s recommendations for the LTA as well as the AA, we could have a generally agreed basis for holistic planning which could have been built on for those with much smaller benefits.
You’re absolutely right that the DB valuation factor is imperfect. The Treasury say they considered a series of valuation factors based on age, benefit increases etc and rejected the idea as it would be too complicated. I agree we need simplicity! But the Treasury chose up to date assumptions for the AA but obsolescent assumptions for the LTA- that isn’t simple!
The headline is political “is this political chicanery?”. The more fundamental issues are about restoring trust and understanding in a complex pension system that just got more incomprehensible.
“It assumes that the average super rich pension contributor will be paying £116,000 above their £50,000 limit or £166,000 in total. As the Treasury know, the super-rich are super clever – this is not going to happen.”
Am I missing something here or does it not matter where they put their money. All that matters is that they were paying £166,000 and if they do from now on will not benefit from tax relief. Therefore as long the money isn’t being redirected into some other tax beneficial vehicle (and I’m not sure what it would be) they will make the required saving…
“I may not be bothered with regards to the amount of tax that the super-rich or even the very rich are paying but I am bothered that the Treasury can play fast and loose with the Government Actuary’s recommendations and with our understanding of the value of pensions.”
Isn’t that exactly what the job of government is. Take advice than formulate a policy around it. If they didn’t make such decisions then the country would just be run by unelected quangos.
There is simplicity about 20 and there is nothing “correct” about any number as it applies at all ages. Increasing the factor would also potentially increase the amount of tax-free cash available offsetting the saving.
I’m afraid I can’t really agree with you, Mark. Pensions mean locking your money away potentially for years. That’s a huge act of trust. Moving the goalposts – and frequently, and to the detriment of some – is arguably the most damaging thing you can do to pensions.
What do you disagree with? I would agree moving the goalposts is damaging.
Mark
Perhaps I misunderstood you. Glad you agree about moving the goalposts. It was your second to last paragraph where you point out the government’s responsibility to make decisions based on best advice yet they have only done that for AA and not for LTA. Both factors involve an arbitrariness which we are all clearly well aware of. I’m sure the general public isn’t, though!
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