The 25th November is likely to be another red letter day for pensions. The consultation on the way tax relief is paid to those contributing to pensions ended on September 30th and we understand that three options are still under consideration.
- Keep things as they are
- Move to a flat rate of relief
- Move to a system of incentives rather than relief with money at retirement being paid “tax-free”.
No one really thinks that option one is viable. It is clear that the Treasury considers that the current system isn’t incentivising the right people to save.
The pension industry has retreated to a defensible position, led my former pension minister Steve Webb; the hope is that the current system of exempt contributions, exempt growth and tax in retirement can be maintained, albeit without higher rate tax payers getting full relief. Modelling suggests that a cost-neutral flat rate would be 30% for all.
But the consensus of opinion is that the Treasury favours a more radical approach, proposed by Michael Johnson for the Centre of Policy Studies. Johnson’s big idea is to bring pensions taxation in line with ISA taxation. The Pension Isa (or Pisa) is already part of the vocabulary. In Johnson’s model, pension contributions would be given a boost by means of a buy one get one free incentive. So someone paying £2 might get £1 paid into the pension up to an arbitrary limit (some talk of £10,000 pa).
The arguments for this approach are that the ISA system is easy for people to understand and a simple “Bog off” system could be controlled by the Treasury to assure that incentives were directed to those it felt needed incentives most.
Speaking with the CIPP last week, I was surprised to hear general support for option three. The consensus among pension experts I had spoken to, was that a major change of this type would be met with opposition from software providers to agents and payroll managers.
The CIPP are clear that their support would be based on a lengthy implementation timetable with the new TEE system, being implemented in 2018-19. My understanding is that this is what the Treasury have in mind.
So why would pension’s pain be payroll’s pleasure. I would suggest there are good reasons. TEE would result in a radical simplification of pension taxation, sweeping away the need for the annual allowance, the lifetime allowance, pension input periods and tapering relief. It also takes the eventual merging of national insurance and income tax a stage further. The short-term disruption is worth the pain for a simplified system going forward.
Secondly, a simplified tax system, focussing on defined contribution workplace pensions demystifies the pension role within an employer’s organisational structure. This accelerates the trend towards promoting payroll administrators to the management of the pension function.
Finally there is a question of fairness. The likely impact of a move to a simplified TEE system will be a redistribution of Government subsidies from high to low and middle income earners. At a time when five million new pension savers, mostly low earners, are due to join workplace pensions (through auto-enrolment), the timing could not be better.
Sceptics will, with good reason, point to a move to TEE as a means for the Treasury to control and possible reduce the tax pay away on pensions. They will also point to the difficulties in implementing a TEE system will be extremely difficult to implement across the public sector. Since the public sector absorbs the bulk of the tax reliefs at present, these are serious misgivings.
Recent reports have suggested that those saving in public sector pensions may not be exempt from change and it would be surprising if George Osborne, with his strong mandate, will leave public sector pensions unchanged.
The most likely outcome, as rumoured in lobbying circles is that we will continue to see the current system of exempt- exempt-taxed operating for defined benefit pension schemes, but with the tax advantages substantially scaled back.
One thing that is sure, whatever the changes, it will be payroll who will be called on to implement them. But if payroll is to take on yet more of the pension challenge, they need to share in pension’s reward. It is time that payroll’s increasing contribution to managing Britain’s pension challenges is recognised.
Payroll’s pain will then be properly – payroll’s pleasure.