It’s auto-enrolment what’s done for tax relief!

pension sell out

I was leading a recent research document from the DWP assessing the impact of auto-enrolment, these are the key findings

  • 10 million workers are estimated to be in the eligible target group for Automatic Enrolment.
  • 9 million workers are estimated to be newly saving or saving more as a result of Automatic Enrolment by 2018.
  • Three quarters of the working population is estimated to meet the age and earnings criteria for Automatic Enrolment.
  • £14 – 16 billion extra saving per year in a workplace pension as a result of Automatic Enrolment by 2019/20. 

There are others relating to the gender distribution and the relative impact between small and large employers but my heart stopped beating when I read the final bullet.

It wasn’t so much the penny dropped, it was 1400 to 1600 billion of them!


 

The vast majority of money saved into auto-enrolment schemes will be under relief at source, a system of taxation which means that tax-relief is granted even where an individual doesn’t pay tax (all the GPPs, NEST and most of Peoples Pensions work like this).

So pretty well all that £15bn is lost revenue to the taxman (£3bn) a year, plus the DWP loses a big chunk of National Insurance because of salary sacrifice (say half as much again). You might say that’s a different budget but the Treasury ends up paying – it’s the bank of Mum and Dad.

So by the time everyone’s in (and nobody’s out) and the contributions have ramped up, we are shelling out another £5bn a year on pension reliefs,

Now you might say that this is to the social good (and you’d be right), but you can’t have a pension system which is so good, everyone’s getting a redistribution. Because you are then just robbing the means of production, Britain’s Gross Domestic Product which has to bear the strain through higher overall taxes. And in the big picture, that is not what Conservative Governments are about.


Something has to be done and pretty fast as in macro terms, 2019/20 is nearly upon us. And of course….

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The easy target is DC personal contribution reliefs, simply knocking on the head the higher rate tax relief and moving to a flat 30 or 33% (the Steve Webb solution) hurts the rich a little but it doesn’t really do the job. I very much doubt it would do more than move the cheese around the board, it is not a fundamental reform – it is tinkering and keeps the status quo- it is of course what the ABI and NAPF want- I don’t think it will happen.

The hard target is the employer contribution, especially the value of a DB contribution, especially the value of a DB accrual in an unfunded pension scheme (such as the teachers, firemen and civil service). Taxing these contributions as a benefit in kind is what should happen but to have an equitable solution that includes the Government employees looks like a nut that’s too hard for even an iron chancellor to crack.

DB will be starved of oxygen until it expires or becomes too weak to put up any further fight and is put quietly to sleepy some time in the future.


 

Think 25th November

My guess is that we aren’t going to wait too long and that the key date may well be 25th November which is when Osborne announces his Departmental Spending Review. If ever there was a day to announce big pension news that would be it. It is by far the scariest day for public finances between now and the next budget, and for all the talk of consultations, I see the majority of the paper written to the Treasury by September 30th going straight in the bin.

Do I think that Osborne will have the guts to do the full monty and start taxing DB accrual? No.

Do I think that Osborne will move to a flat 33% or 30% structure? No

Do I think that Osborne will give DB another rabbit punch to the kidneys? Yes – most probably by fiddling with the GAD conversion rates to make DB accruals more expensive effectively reducing the AA and LTA still further.

Do I think that Osborne will move to incentivised TEE (the Altmann solution – taken on by Michael Johnson as BOGOFF) – an absolute yes.


 

And what are we going to see?

And what will be the key dates to introduce all this? Well he can keep chipping away at DB all the time, so pips will be squeaking as soon as GAD get round to doing the Chancellor’s bidding (actuarial independence -pah!).

But the big DC change that will impact the vast majority of our future benefits? Well you saw the numbers. If you want to hang bad news on anything, put it on the hanger next to good news and call it “fair”

We are about to lose £5bn a year in tax and NI, as AE kicks in – in 2019-20. The coins all dropped as one. That’s when you introduce your lasting settlement and see if there is anyone to stop you.

In my opinion, there won’t be. Osborne, the master strategist, is seeing his ducks lining up in a nice neat row.

 

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About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to It’s auto-enrolment what’s done for tax relief!

  1. Gerry Flynn says:

    So taxing the employers pension contribution as a benefit in kind for DB employees, pray tell what would happen if the employer makes a large payment into the fund to help reduce the deficit, is this treated as a additional BIK? If it is, then are pensions who are in receipt of pensions are going to have to pay tax?

    • henry tapper says:

      The contribution might be considered the balance of costs to purchase that year’s accrual after the mrmber’s contribution.

      Nothing to do with deficit funding. But you’re point is good. It’s a difficult one and that’s why it is bein kicked into the long grass (for the moment)!

  2. Steven says:

    Could it be that TEE is just a smokescreen to take the brunt of the mighty pension and insurance industry lobbying machine. The actual change being the removal of higher rate tax relief and only allowing basic rate relief for all (with some side rules to stop salary sacrifice avoidance). This could then be accompanied with warm messages of having listened to the industry on TEE.

  3. henry tapper says:

    Could be – i doubt it – so do the bookies!

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