4 months until…. Guest Blog from Ralph Frank

Four

 

The Chancellor of the Exchequer has confirmed that the Government will respond to the consultation into pension tax relief in the 2016 Budget.  The confirmation was set out in the 2015 Autumn Statement.  This same Statement set out Government’s ambition “to extend opportunity for working people at every stage of their lives”.  Here’s hoping that Government’s Response to the Consultation will maintain the opportunity for those in work to save for later life anywhere near as effectively as those already retired.  Current retirees benefit from the triple lock on the Basic State Pension in addition to levels of tax relief/protection no longer available on contributions and/or accumulated savings.

 

The confirmation of the forthcoming Response in the 2016 Budget does begin to manage expectations/anxieties related to when (some of) the uncertainty created by the Consultation might be addressed.  However, over 100,000 employers are due to go through Automatic Enrolment (“AE”) staging between the 2015 Autumn Statement and the 2016 Budget, more than doubling the number of UK employers providing pensions.  These employers are being reminded of their obligations on a regular basis by Workie.  The employers’ affected workers are being encouraged not to opt out by the tax relief (currently) available.  How solid is the basis on which these employers and workers are making material commitments and decisions?

 

One of the stated aims of the Consultation is to simplify the system of tax relief.  However, it seems all but certain that tax relief is going to become more complicated shortly after the Response is delivered.  Tapered relief for those effectively earning over £110,000 per annum is due to be introduced in the tax year commencing less than a month after the 2016 Budget is tabled.  Thisincreased complexity is unlikely to encourage pension saving by those affected.  The reduction in tax incentives probably compounds this discouragement too.

 

A long-term resolution of the pensions tax relief issue in the 2016 Budget would be welcome but do the next four months, in addition to the two months that have elapsed since the response period ended, give the Government enough time to clarify what it is seeking to achieve?  The Consultation raised two particularly challenging issues:

  1. What Government considers a sufficient standard of living in retirement to be. Once the income level has been identified, the corresponding amount in capital terms can then be calculated.  Ideally, the post-Consultation taxation regime will be agnostic as to whether this standard of living is supported by Defined Benefit (“DB”) or Defined Contribution (“DC”) provision.  The current taxation regime heavily favours DB provision; and
  2. How the Government defines its long-term fiscal strategy. Any changes will have an impact on this strategy well beyond 2020.  The amount of tax relief is a material input into this strategy.  Who benefits from this relief is another matter of Government policy.  Government cannot currently identify whether relief is provided to a DB or DC scheme let alone specific groups of members.

 

The Statement claimed that “the government will provide opportunity for working people through higher wages, lower taxes and lower welfare…..the government is taking action to reward work and aspiration”.  However, the Chancellor has dampened many savers’ retirement aspirations since taking office in 2010 through reductions to the Annual Allowance and Lifetime Allowance.  These changes have ignored the increased amounts of capital required to support a specified level of income in retirement due to falls in bond yields and increasing longevity over the corresponding period.  The tapering of tax relief will increase taxes for those affected, even after taking account of changes to tax bands and rates.  Will the 2016 Budget deliver a simple, consistent, transparent and sustainable pensions tax regime, strengthening the incentive to save?

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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1 Response to 4 months until…. Guest Blog from Ralph Frank

  1. henry tapper says:

    Apologies to all who say Ralph’s surname spelt with an “s” at the end. I confirm (and sing) – “there’s only one Ralph Frank!”

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