The ludicrous complexity around the 2016/17 rules for the pension annual allowance, are only part of the story! Add to them , the extraordinary complexity surrounding the use of Pension Input Periods and you have manna from heaven for pension tax specialists and a “nightmare on pension street” for those on high earnings with big pension pots.
The Nightmare on Pension Street is the title of Jo Cumbo’s excellent peice on this which appeared while i was writing ming. I’m glad we are saying the same thing, I wish I could say it in the same way but I’m a blogger not a professional and if you can afford the FT paywall (which if this stuff interest you – you should), here’s a tweet from Jo that can take you there
Of course all this nonsense would disappear if we had a proper simplification of pension taxation. My sources told me that we would get some definite news on the direction of travel in the autumn statement (November 25th) but it looks – despite the Treasury throwing the kitchen sink at the problem – that all we’ll get is a green paper with options. Which is pretty well what we got in the budget,
The choice is very simple. So long as we have an EET system, we will have problems controlling tax relief and the Treasury will have to operate Heath Robinson type mechanisms like the AA and LTA to stop higher rate tax payers stealing all the cheese.
If we move to TEE, the higher rate tax payers will not have the opportunities to game the tax system , we won’t need the annual allowance and the lifetime allowance and there can be a more targeted approach to tax relief that should benefit those who need pension income most, those in lower paid jobs.
But the pension taxation system is so complicated that unless you went into the HMRC’s back office , dragged out all the books and burned them in the courtyard of Somerset House (something Robin Ellison regularly threatens to do), then any simplification is going to take time. And there will be losers as well as winners and the good folk who are pension lawyers (Robin included) will have a field day/month/decade demonstrating cases where people have been unfairly treated on a retrospective basis.
Which will mean we will have to have “preservation” meaning that everything that came before will have to be granted and everything going forward will be subject to change.
Preservation is a gift to lawyers.
Meanwhile, every month, lots of poor people who are being told that their pension contributions are being topped up by the Government are being denied this top-up because they are not in schemes that offer relief at source. A lot of these people had to join schemes under auto-enrolment and have not opted out because they either find that too hard or they are convinced by the man in the turban that we’re all in!
Although it’s at the other end of the earnings scale from the problems with the annual allowance, the Net Pay /Relief at Source is just as much a product of simplification.
The reason we have two types of tax relief on contribution is because the occupational pension industry could not manage refunds and relief at source. Until September of this year, occupational pension schemes could be subsidised by contribution refunds from members who left in the first two years. This doesn’t happen any more (thank goodness) but these schemes can’t move to net pay because it would be too expensive (or so the people who manage administration tell them).
Ironically, when I ask them when they are likely to move to net pay, they point to the current consultation on pension taxation and say, “when we have clarity on that”.
Well we aren’t going to get clarity on “that” till the Budget in 2016 at the earliest. I am with the CIPP in asking Government to announce soon and implement later (2018/19) to give everyone a chance to get auto-enrolment in and systems changed.
So even if we get an announcement on how things are going to change in April, we will still have a number of years of transition and of course preservation of everything that went before which is all good for lawyers and top-end tax and wealth advisers, but a nightmare on pension street for the rest of us.
Can we point a finger?
I don’t want to point a finger at anyone, least of all HMRC who are boldly going where no HMRC have gone before and thinking the unthinkable.
If we see recidivism from the proposed TEE system, and if it preserves the complexity we see today not just for what went before but for what goes forward, I will be more than pointing a finger, I’ll be down the Treasury with a fistful of complaints. Moving to a flat-rate taxation system looks to me to “scotch the snake not kill it”. It leaves enough opportunity for the experts to find ways to complicate things enough for loopholes to emerge.
So I’ll only be pointing fingers if we don’t get proper simplification and that means a move to a single taxation system for ISAs and pensions that everyone “gets”.