In this article I argue that any tax increases levied on the rich are ok by me, and I’m rich.
The bias of vested interest
The vast majority of people get tax relief on their pension contributions. Some people are excluded by being non-tax-payers. This is because of the net-pay lottery (enough said).
I will remind readers that since the introduction of stakeholder pensions, people can get incentives to save – even if they are still children – rich parents have been pre-funding children’s pensions for nearly 20 years. There’s no tax-loophole that those with excess savings won’t exploit. But I won’t carry on about the iniquities of the “information asymmetry”.
I will instead focus on the annual and lifetime allowances which are designed to limit the amount of higher rate tax relief that the top 1% of earners get as a tax-subsidy for their retirement savings. These caps are in place because the Government has not properly tackled tax-relief on contributions, something they last threatened to do as a result of the extended tax-consultation in 2014-15 that came to nothing.
The rules around the annual allowance , the money purchase allowance and the lifetime allowance are complex. The thresholds for contributions and capital sums are still way above the aspirations of most people. The annual allowance is about 1.5 x the average wage and the lifetime allowance still allows us to be pension millionaire’s before being taxed at higher than normal levels.
There is undoubtedly scope for further reductions in both annual and lifetime allowances and if the Chancellor decides to fund the NHS rather than rich people’s wealth pots – so be it. I would rather see a properly functioning health service than a taxation system skewed to the needs of the financial elite.
Proper reform is long-overdue.
The work done by the Treasury in the 2014-15 revenue is not lost. It sits in some digital locker and can be revived at any time. It is possible for schemes to pay all kind of things (including HMRC claims on a fund) and this is how the taxman collects money from those who overpay their pensions at present.
We know that “scheme pays” was an option under consideration , when the Treasury were seriously contemplating a move from EET to TEE (where there’s no tax-relief on future contributions and those contributions are tax exempt on repayment.
People who think that “scheme pays” could not be used to reorganise the allocation of tax relief should be careful. With Real Time Information, the Treasury have much bigger guns to play with.
Tinkering with the Annual Allowance and Lifetime Allowance may be the least worst option for the wealth management industry.
It’s the wealth management industry that’s under attack
Let’s not mince words, the pensions industry is now a “wealth management game”. People are increasingly cashing out their defined benefits into wealth and the idea of converting wealth back into pension is deeply unfashionable. Many wealth managers are now managing money for their clients as a means to mitigate all kinds of capital and income taxes. “Pensions” is no more than the title given to a tax wrapper.
Those organisations who try to reassert pensions as a “wage in retirement” are shouted down by the wealth management industry. It’s happened twice in the past two weeks, firstly when David Leech and Jon Spain argued for risk-sharing at a CSFI event in London and secondly when Con Keating argued for CDC in a posh hotel in Hampshire (CA Summit).
The idea that anything can get in the way of the relentless surge towards treating pensions as a “capital reservoir” is seen as absurd. Wealth managers rail against the 1;20 exchange rate for DB pensions , arguing that the ridiculous transfer multiples enjoyed from schemes with gilt based discount rates, is the new normal.
Some of these people even argue that scheme pays could be used to pay financial advisers for transfer advice if contingent charging is removed.
Small wonder that Chancellor Hammond sees pensions as easy game. Any sense of the social purpose that was originally ascribed to justifying pension tax-relief, has been swamped in the wave of industry euphoria over pension freedoms.
The Chancellor has some justification in taxing the wealth management industry, though whether he dare, in the face of his wafer-thin commons majority, is another matter.
Should we care?
I am beyond special pleading for “no-tinkering”. The wealth management industry is so adept at tax-avoidance that it almost relies on the threat of further tinkering to justify the advisory framework it has created for itself.
Losing a few more tiles off the pension tax-shelter will not seriously harm the wealth management industry which will continue to service the needs of the 6% of us who regularly take financial advice.
Ignoring the needs of the 94% of Britain’s who don’t take advice (and typically use the NHS) is a more serious matter.
If the Chancellor chooses to whittle away at the tax-privileged status of the wealth management industry’s favourite tax-wrapper, that’s fine by me.