Tax, national insurance and pensions policy should be put in a vault marked “toxic” and should be handled with extreme caution.
This morning I have three toxic issues to prove my point.
- The fiasco of announcing an increase in national insurance to the self-employed in the context of a “read my lips- no new taxes” manifesto commitment
- The unearthing of a report buried by the DWP confirming that the net-pay/relief at source tax issue is bigger than anyone anticipated
- The realisation that NEST carries extreme death-risks for high net worth investors.
What have these random matters have in common? Well they are all issues created through the unintended consequences of well-meaning Government interventions;
and they are all issues can be mitigated through Government working with the private sector.
The National Insurance Fiasco
We now hear that the legislative changes for the new NI rates will be pushed back to September from April. This appears to be an intervention from No 10 and a mild slap to the Treasury.
In the meantime we have an auto-enrolment consultation which includes questions on the inclusion of the self-employed in the project. I wrote yesterday about ideas that have been floated to link national insurance increases to auto-enrolment. Here are the thoughts of a sage political commentator on the above.
As they’ve grasped the nettle of increased Class 4, we could suggest that the Treasury get off the hook politically by retaining the Class 4 increase but allowing the self-employed to divert (their own money) into a pension. It still leaves them with a fiscal hole, but would be less of a u-turn than simply scrapping it!
Challenge one for the private sector, create a mechanism that allows the self-employed to choose their workplace pension and a mechanism by which their money can fund it (rather than the national insurance fund).
The net-pay nightmare
The very busy Sir Steve Webb has unearthed a report produced late last year from the DWP. This has been well reported in the FT but for those without a sub, let me quote directly.
Of course this is absolutely ridiculous, most employers staging now have no chance of even understanding the issue, let alone researching the market to get the right pension. The DWP goes on in equally silly vein
I will not labour the point, the Pensions Regulator’s website is not a user-friendly place. It is a kind of Wikopedia of jumbled information, as useful in choosing a pension as a chocolate teapot is for making a brew.
The private sector can help employers choose a suitable pension, indeed http://www.pensionplaypen.com specifically analyses employer payroll data and warns against net pay schemes where the net-pay nightmare will arise.
Unfortunately the Government will not acknowledge this and in a recent reading of amendments to the Pensions Bill knocked out a clause that would have required employers to choose a suitable pension , because it considered the Pensions Regulator’s site contained all the ingredients an employer needed.
Tesco contains all the ingredients to make a banquet, but it isn’t a restaurant. The private sector can get the Government off the hook , but the Government has to work with the private sector.
Don’t die rich with NEST!
A helpful rival to NEST reminds me of this statement mad in 2013 by Graham Vidler, then NEST (now PLSA) spin-doctor.
If you’ve been reading the latest stuff on this blog, you’ll know that I’m pretty keen on NEST’s “no penalty transfer and a 0.3% AMC” on the funds. I even called it the bargain of the century.
Unless of course you happen to be someone with a bit of property or a business or some shares – in which case you are putting the transfer into NEST in a big box marked (MR TAXMAN -please take 40% if I die).
Now I’m not qualified to give tax advice, but I’m going to make damn sure that employers choosing NEST using http://www.pensionplaypen.com are properly appraised of both the good and the bad of the product.
I have not been flagging this issue so far as NEST pot balances have been so low. But if we are to have a system where NEST is going to be acting as a pot follows member aggregator, I think the private sector IFA community have a role to play to make sure that people have their DC pension pots in discretionary trusts and not managed the NEST way.
Or perhaps NEST see the way to pay back its £500m+ loan as through unnecessary Inheritance Tax payments from deceased members!
Politicians and Civil Servants can be wrong – they need us as much as we need them!
So there you have it, three blogs for the price of one with issues linked by a common theme. Government make pensions, tax and national insurance complicated and difficult. The private sector helps them out by keeping people appraised of the implications of what they are doing.
Except the Government typically doesn’t listen to the private sector because it thinks it knows best and the private sector is out to rip off its fellow man.
To the Government, we are sharks, to us the Government are bumbling buffoons.
This is no way to carry on! To make Auto-Enrolment work, we need to acknowledge our cock ups and work together to right them. The private sector cocks up, so does the public sector.
But to turn down the hand that is trying to help, as this Government has been doing with regards the choice of workplace pension is unforgivable. It really is time that the Government started the implications of the employer’s duty of care in choosing a pension for its staff and started talking to private practitioners doing their best to help.
Great blog from Will Robbins of Citywire on national insurance changes http://tinyurl.com/j3bknel
Jo Cumbo article in FT on net pay issue; http://tinyurl.com/hudf7q3
tPR paper on net pay issues (and AE trigger levels) http://tinyurl.com/jnqn839
NEST 2013 newsletter – source for the Graham Vidler quote https://www.nestpensions.org.uk/schemeweb/NestWeb/includes/public/docs/NEST-adviser-news-april-2013,PDF.pdf
So, the “great NEST consolidation” can’t happen ‘cos of the (really rather significant) death benefits issue! OK, you could still opt for the low costs and buy a whole of life policy, but the cost of the latter is very likely to negate the pension fund cost savings. I can’t see many wanting to do that!
This kind of reminds me to the potential problem concerning pension transfers, whether DB to DC or DC to DC, when they can fall foul of section 3(1) IHT Act 1984. This is where HMRC can deem that a transfer of value has been made to avoid IHT if an individual in loosely-defined ill health dies within two years of making such a switch. With a naturally aging demographic looking at what can be very substantial amounts of money held in pension funds, I’m beginning to think that anyone with a transfer value of more than the nil-rate band should be medically underwritten for life assurance BEFORE and potential transfer takes place.
http://www.hmrc.gov.uk/maunals/ihtmanual/IHTM17072.htm
The ability to manipulate death benefits available by way of transfer is the crux. One would struggle to argue that transferring benefits from, say, a DB to a Dc scheme would not be improving the death benefits available and therefore potentially depriving HMRC of revenue. Ill health is what HMRC say not serious ill health! Does that mean type 2 diabetics, like me, for instance, long-term cancer survivors?
Yikes!
This would not have happened if NI increases was announced when self- employed would be entitled to the new state pension and also receiving credits for the years self-employed prior to the introduction of the new state pension.
For any self-employed person who has been self-employed reaching state pension age in this tax year they are being allowed to receive the full new state pension of roughly £155. 65 where under the old rules they would have only receive a basic state pension of £119.30.
It was a great surprise to me that this happened as I would have thought they would have only been allowed to earn the the higher sate pension for future service.
If this had been explained and rise in NI announced a few years earlier I think the NI increase would have been more easily accepted as they would have seen they were receiving extra state pension for the increase in NI.
For any self-employed person person who has been self-employed all their working life who reached state pension age in in April last year year under the new state pension saw their state pension go up from by roughly £36 pw . A bargain.
I doubt if there will be many people in this position,as many would have been in employment in contacted in or contracted out pension schemes for parts of their working life. If contracted out it complicates matters and it is possible they will not receive any credits for the years contracted out and will only earn higher state pension on and after 6 April last year if still self-employed.
When the new state pension was announced and the pension profession saw that self-employed were going to receive the new state pension , their were comments then that they thought NI would have to increase for the self-employed.
A blunder by the Treasury and their spin-doctors.