Everyone knows that pension tax-relief is broken and those who try to cling on to the current system do out of vested self-interest (and I include one former pensions minister in that statement).
Wealth managers have come to view tax-relief as a “wrapper”, a convenient marketing tool to direct client’s wealth into capital tax mitigation schemes (aka SIPPs). The sector’s latest trade body even calls itself the “Tax-incentivised savings association” or TISA for short. The 10% of us wealthy enough to want wealth management now consider tax-incentivisation a right not a privilege.
The Treasury committee said tax relief on contributions was ‘not an effective or well-targeted way of incentivising saving into pensions. The Government may want to consider fundamental reform.’
This apocalyptic consideration has been ruled out by Philip Hammond and for good reason. His rebuttal of the Select Committee’s call is in this week’s Money Marketing
Responding to the committee today, the government has said that its consultation has shown no agreement on the path forward.
It had already consulted at the summer Budget in 2015 over whether pension tax relief reforms could strengthen incentives to save, but saw no consensus in a way to meet the key goals it set out then.
The response reads: “The government is also aware that any changes to the pensions tax relief regime could have significant impacts for pension schemes, employers and individuals. While the government keeps all taxes under review, no consensus for either incremental or more radical reform of pensions tax relief has emerged since the consultation in 2015”.
Fundamental reform of the tax-relief of pension contribution impacts everything, it impacts payroll systems, HMRC coding and providers. Most of all – it upsets people and at a time when everyone is super-upset – that’s not good.
A flat rate contribution structure might be implemented and circumvented by moving higher rate tax-payers into salary sacrifice. “Scheme Pays”, might help the Treasury, but it would be a nightmare to administer at scale. Where it is employed at present (mainly to collect tax on contributions that breach the annual allowance, it is already building up administrative problems for the future.
Nicky Morgan is right to press for fundamental reform, the current system incentivised people to retain wealth in pensions wrappers, not to save. The success of auto-enrolment suggests that people would rather be nudged than incentivised (most people don’t know they’re getting tax-relief or even what tax-relief on pension contributions is).
But the Daily Mail is wrong in implying that Nicky Morgan is calling for a change in the budget, the job of a Select Committee is to guide Government in long-term strategy. It would be failing if it did not call for reform but Hammond is least likely to introduce reform in the teeth of BREXIT.
Instead, look to the capital elements of pensions for Treasury “top-slicing”. If you want to understand how fiscally exciting the Annual and Life Time Allowances are, read New Model Adviser’s excellent summary.
The AA and LTA are vulnerable for three reasons
- there is plenty of fat to be skimmed off (see NMA numbers).
- it is easy to collect tax (using RTI) from those with money in pension “tax-wrappers” (the wrapper makes “wealth” a sitting duck).
- targeting the rich is considerably less politically challenging than depriving the poor.
On point 3, I hope that Philip Hammond will read the reminder we are sending him about NET PAY. The scandalous silence of the wealth industry on the deprivation of government incentives for the poor is matched (in ignominy) by their ridiculous bleating for the rights of the rich to harbour money in tax-exempt SIPP wrappers.
When will see true reform?
Reforming pension tax-relief is the art of the possible. At present it is only possible to tinker by “salami-slicing” pension capital allowances. When the Government feels it is in calmer waters, it will no doubt look at Nicki Morgan’s suggestions. The Treasury came darn close to proper reform in 2015 but ducked it , fearing the consequences of a BREXIT vote. They got BREXIT and fundamental pension reform is “impossible”.
Don’t think that this is the end of the matter, the fundamental reform sits on the shelf – waiting for the “possible” moment.