A new pension deal

new deal


There is only one thing that distinguishes a pension plan from an ISA plan and that is liquidity. By “liquidity”, I mean the ease with which the plan holder can get hold of the money.

The simple social contract that holds in this country, is that taxpayers will their fellows for holding on to their money and not spending it early. ISAs get some reward, pension plans get more reward. This reflects the greater sacrifice made by those who save into pension plans – they give up any right to their money till 55.

My understanding, having read the Treasury consultation on pension tax incentives, is that it doesn’t challenge this consensus. Pension plans will continue to receive greater tax incentives than ISAs, the issue is over “how”.

Any thought that the plan for  pensions and ISAs to be given tax equivalence is rubbish. This is what the Treasury is actually considering…

a fundamental reform of the system so that pension contributions are taxed upfront (a “Taxed-Exempt-Exempt” system like ISAs), and then topped up by the government, may allow individuals to better understand the benefits of contributing to their pension as the government’s contribution might be more transparent…

Anyone who has been involved in selling pensions, advising on pensions or providing “financial education” knows what the Treasury is getting at.

The issue is not just that pension tax-relief is expensive, it’s that HMRC are getting insufficient return on the investment – in terms of voluntary long-term saving by those who will otherwise by dependent on HMRC – in later life.




At the heart of the consultation is a review of how people think about savings products.

…these issues have led to a shift in consumers’ expectations of how savings products should operate, how they should be priced and how they should be sold

The Treasury don’t admit to making mistakes, it’s not in their DNA. Consumers have moved on, taxation hasn’t, it’s time for fundamental change.

But implicit in the consultation is an admission that policy-making on pension taxation over the past 30 years has been pretty shoddy. Instead of having a big idea and sticking to it, politicians have twiddled and turned and made pensions taxation into a complicated thing that benefits lawyers and tax-advisers to the detriment of popular confidence.

The Treasury are now consulting on how they can restore confidence in pension plans by making their tax-incentives simpler and fairer.

Since the point of the Pension Play Pen is to restore confidence in pensions, I am very impressed. Bring it on.



The most unfair system – the net pay system – is currently denying a substantial slug of pension savers any form of tax-relief on their savings. You can read what the Government has to say about the difference between net pay and pension relief at source here

Unfortunately Government do not understand the implications of the two systems for the low paid. I know this because I ask them,

The National Association of Pension Funds, which runs the Pension Quality Mark, is quite happy to award its quality mark to schemes that operate net pay arrangements. If you look at this list of employer sponsored pension plans, you’ll see that the majority are occupational schemes and they operate under net pay.

In as much as the NAPF and PQM are institutions, the practice of denying low earners tax relief so that high earners can have quicker access to their tax relief (what net pay does) is institutionalised.

Amazingly, the Pension Quality Mark, which is supposed to be the standard for trust, master trust and contract based pensions, makes no mention of aligning the scheme’s taxation treatment to the demographic of the staff. It doesn’t even ask the question!

If you don’t believe me- read the standard!

I don’t think that the NAPF is institutionally biased towards higher rate tax payers and against those in low earnings who do not pay tax. I just think the people who work there have no idea or interest in what it’s like to be poor. Consequently, they are happy to promote schemes as having PQM or even the wonderful PQM+ which are cheating poorer members to an entitlement of an extra 20% of contributions.

I don’t think that the pension tax system is institutionally biased either. I think it has become so complicated that- apart from a hardcore of tax specialists (who generally don’t give a toss about low-waged people), nobody understands the rules.



Sadly, the “experts” who think they will be leading the debate on pension taxation will be the NAPF and the pension lawyers and the tax specialists. Here is Joanne Segers  in the NAPF’s response to the pension taxation consultation.

“Experience shows us that long-term success in pension policy is built on a shared understanding of a problem, a shared building of the policy solution and a shared responsibility for delivering that solution. For this review to succeed it must look at taxation of pensions in the bigger picture of what genuinely incentivises people to save consistently over the long-term for their retirement.”

The NAPF clearly want to be at the heart of this debate.

But what is clear to me, is that the NAPF and their PQM department do not understand pension taxation as it effects low-earners. Nor do most civil servants. This is because they are higher rate tax-payers and spend their time with other higher rate tax-payers.

Most of the experts – the lawyers, tax experts and their customers the trustees, the finance directors , HRDs and CEOs do not have any experience of what its like to pay no income tax , to collect benefits and to worry about pennies rather than pounds.

Which is why they continue to dish-out gongs to net pay schemes while worrying about the impact of the annual and lifetime allowance on take up rates.

For Joanne Segers and the NAPF to participate in this debate, they need to get off their high-horse and start from the bottom up.

What Martin or Paul Lewis can tell the NAPF is that what incentivises people to save is knowing

  1. they will be treated fairly. The current tax-system is not doing that.
  2.  what is going on. The current tax-system is not doing that.



When we have a simple system that is fair and understandable, we will be able to build confidence in pensions. That will allow the Government to build on what has already been done with automatic enrolment and the reform of workplace pension schemes.

It will create an environment where people will want to save and either pay more voluntarily or through a ratcheting up of the AE contribution scales.

If we get it right- fundamentally right- we can make it simple- keep it simple and have a sustainable taxation system that can’t be gamed by the experts.



In the meantime, there will be considerable pain as we move from one system of taxation to another. That pain will be felt by pension providers, payroll and yes – by those who will no longer have the luxury of higher rate tax-relief on their pension contributions.

Undoubtedly there will be transitional problems, not least in the super-obscure world of DB pensions and the fiendishly complicated processes established to comply with auto-enrolment.

But the prize is worth it. A properly reformed pension system that has the confidence of the majority of the people in this country and gets Britain saving – is something to go for.

I for one am ready for a new pensions deal.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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