Those who see pensions as the fat underbelly of Government spending undoubtedly include the Treasury, who are busy sifting through their options this weekend in readiness for the Chancellor’s Autumn budget on Thursday.
One of the rituals of modern life on planet pension is the soothsaying of pensions Cassandra Steve Webb who mis-predicts woe with monotonous regularity.
He was at it again at the First Actuarial Conference last week and I hope he is wrong again. But, his arguments are plausible and repeatable on this blog.
Steve’s starting point is to ask what “everyman” or “prudent-man” or Joe Public might consider a decent wage in retirement and he concludes it is the pension of a teacher not a head-teacher. Working on the conversion factor 1:20 , the lifetime allowance gives you a £50,000 pension , which is the sort of pensions a head might get for a lifetime’s service (50k x 20=£600k). But a teacher wouldn’t get a pension of more than £30,000 (30k x 20 =£600k) . Apparently, Treasury logic is that tax incentives could be cut to say £600,000 from £1,000,000 and would only offend head-teachers.
I’m not sure the former pensions minister was being entirely serious about Treasury logic here but he was clearly serious in his contention that the Treasury hates pensions and that “honey I shrunk the LTA/AA” is a credible strategy for spreadsheet Phil.
In previous year’s Cassandra has argued that higher-rate tax relief could be abolished. This always seemed a daft idea, schemes could convert to non-contributory or promote salary sacrifice and the net impact (at least on high earners) would be zero (there could be unfortunate consequences for low earners as recent blogs have shown.
But the Treasury still has one nuclear option up its sleeve, one that it seriously considered in the run up to the April 15 budget and that’s to expand the use of Scheme Pays. Scheme Pays is a way of getting you to think you are getting tax relief buy giving you the same take home as you always got, but knicking the tax-relief back out of your pension. It is how the Chancellor gets his extra tax if you exceed the annual allowance and aren’t able to write out a cheque for the tax due.
Scheme Pays is an excellent wheeze which puts the onus on pension scheme administrators to pay our tax for us and put a lien on our future benefits. It’s painless, devious and cynical and it’s the kind of policy that really appeals to the slick kids who run the Treasury. Whether Phillip Hammond has the Ed Balls to introduce Scheme Pays to abolish higher rate tax relief is highly unlikely.
But if he wanted to really take on the enfeebled pension industry, he could go all the way to Paul Johnson and abolish all upfront tax-relief by taking away Pension Relief at Source, stopping higher rate self-assessment claims and using scheme pays for all net pay schemes.
That last “nuclear” option would net the Treasury so much money that they could afford to pay the kind of terminal bonuses that Paul Johnson envisages (Lifetime ISA +).
What do I think?
The overall the cost of tax relief to the government went up by £3bn last year and faced with the difficulty of getting primary legislation through a hostile House of Lords, the government would need to turn to tax relief to make up shortfalls as this was not a matter voted on by the House of Lords. I reckon it unlikely, however, that the pension tax free cash would be targeted and the Chancellor would be reluctant to do much on inheritance tax.
With auto-enrolment quintupling minimum personal contributions over the next five years, Phil is going to have to prioritise pensions just to meet the present taxation promise. I’m with Steve Webb – despite his poor track record – and worry about the LTA and AA getting appreciable hair-cuts.
Cutting higher rate tax-relief is a non -runner – for avoidance reasons; the scheme pays options is a live outsider. Trimming the annual allowance and lifetime allowance is second favourite with the “do nothing – and wait till times are easier” the odds on favourite!