Terence

Terence O’Halloran and Eleanor Downie have provided a response to my blog proposing a radical solution to the problems we all find with the current system of pension tax relief. Unfortunately WordPress spammed the comment and it only found the light of day when I was doing some cleaning up yesterday – apologies to Eleanor and Terence.

Here is their comment, which deserves its own blog!

Terence and Eleanor – credentials

We both have over 45 years of individual experience and Eleanor has, for the last five years, been advising with the local Citizens Advice Bureau as an addition to that collective experience.

Most of that work is pensions and benefits related. Eleanor is a backroom Pensions Guru and erstwhile business partner to me engaged directly with the public. I listen to her and we believe that our current crop of politicians and academic consultants are creating a great deal of damage to individual pension rights through ill-informed interference in return for considerable fees paid to ‘consultants’.

If Dame Ros Altman along with Henry do likewise, they are in danger of creating mischief, seemingly without realising it. Our Rule 1 is “never confuse interference with assistance”; the cost, as we have seen with ‘Pension Freedom’, is just too highly explosive to contemplate.

Failings of large actuarial firms

As Fellows of the Chartered Insurance Institute and ‘Chartered’ individuals we presented to groups of employees of all shapes and sizes on the subject of pensions, their pensions. We dealt with members individually as required involving firms with up to 120 employees (the largest cohort of employers).

Our experience of large actuarial firms has been that they purported to advise the rank and file of the say 2700 employees of the large Lincoln company that they provided pensions to. The problem was that they failed to communicate with, let alone understand, the individual members and only ever consulted with the top management of that company. Individuals on salaries of £8,000 to £50,000 per year were seldom, if ever, spoken to from one decade to another. How could the advisory entity appreciate the employees thoughts and aspirations? What basis for advising government did those actuaries and national firms of accountants have?

We dealt with some 30 of the employees of that large firm and their comments were all similar. They never saw anyone from the adviser company. In the light of that fact many ‘experts’ do not share in our experience nor our understanding of the degradation and destruction of the pensions industry in the United Kingdom since 1986 when it was at its peak.

A challenge

Eleanor and I could well have something fundamental to present to the current discussion. We are in unison with the following comments. The challenge is, does Henry have the will to publish, and more importantly perhaps, pursue a different path. We hope that at least he and Ros will air our views and establish any consensus or disagreement. In that way we may all learn from each other and find an acceptable common-sense way forward.

We managed to log on to Ros Altmann’s website “Pensions and Savings .com” which showed her comments but not the responses under the blog.

Ros Altman obviously wants to eliminate higher tax relief on pension contributions, but are there are bigger issues to consider first?

A lot of the current problems have arisen because of the government “tinkering” with the system without really knowing what the consequences might be.

Allowing members/policyholders to take the whole of their pension pot as cash, even with tax on 75% of the fund, is one of these anomalies. It was a ruse to raise revenue, nothing else (a sop to the very rich? maybe?) Access to a personal pension fund should only be permitted for small pots with an upper limit . The previous ‘pensions triviality limit’ was £18,000 from all sources. If this was increased to £20,000 with inflation proofing into the future it would have been a reasonable figure.

TEE Nonsense

The discussion about whether the whole tax basis of the pension system should be changed from the current system of EET to TEE is nonsensical as long as the total fund can be taken as cash. A transitional change over time is suggested but that would need to be a generational time scale or there would still be individuals who had been given tax relief on the early years contributions who at a later date could receive the whole resulting fund tax free.

Tax relief is an encouragement to save which, together with investment returns being mainly tax free (apart from the circa £5.4 billion tax receipts per year to government following Gordon Brown’s removal of ACT relief [to fill government coffers] at pensioners expense in 1997). That bounty to the government pertains to this day. For employees, an employer’s contribution gives encouragement for long term investment for retirement, rather than short term expenditure if it is drawn down. Without those incentives there is little argument to invest in pensions as opposed to ISAs.

We are not convinced that a change to TEE from EET would benefit the lower earners compared with the higher earners. The comparison with LAPR and MIRAS is not relevant – they applied to a completely different type of tax relief.

Non tax payers and low income individuals receive an uplift on their savings with the tax relief as do employers contributions under the NEST automatic enrolment schemes. However part time earners, particularly women, fall under the entry thresholds and therefore do not qualify for the relief.

The NHS problem – not helped by Henry and Ros

Turning to the NHS – the limits relate to both highly paid medical staff and administrative executives. We do not for a minute think that it affects their productivity. We believe that is disingenuous to those involved to make those assertions. We do believe that some staff have refused promotion and others have limited overtime to prevent limits being breached. However, the rules are so complicated that we are sure that most health staff are unaware most of the time about whether, and or how, they are affected. Mischief makers are at work and your own and Ros Altman’s contribution is unhelpful in this regard.

If readers google Lifetime Allowance (LA) and Tapered Annual Allowance (TAA) under the NHS pension – on website nhsbsa.nhs.uk/member-hub then there is information relating to both.

The lifetime allowance is £1,055,000 w.e.f 06/04/2019 and any excess is taxed at 55%. (The original allowance given under pensions simplification has been reduced – the current level seems to be subject to annual inflation proofing.)

The Tapered Annual Allowance (TAA) was not introduced until April 2016, as a way to reduce the annual allowance for contributions from £40,000 and above. It is applicable to those earning over £150,000 with the rate of reduction on the £40,000 at £1 for each £2 that the adjusted income is above TAA. TAA gives a maximum reduction down to £30,000 at earnings of £210,000. These constitute considerable earnings when median earnings amount to £26,500 per household or thereabouts.

We have looked back to what the original limits were when so called pension simplification was introduced. In the tax year 2006/7 Lifetime Allowance (LA) was £1,500,000 & the Annual Allowance (AA) £215,000. These were incremented year by year such that in 2010/11 they stood at £1,800,000 for LA & £255,000 for AA.

In 2012/13 there was a reduction to £1,500,000 for LA & £50,000 for AA.

A further reduction occurred in 2014/15 to £1,250,00 for LA & £40,000 for AA.

In 2016/17 a further reduction brought LA down to £1,000,000 and AA stayed at £40,000. These figures appear to have become the new base with increments on the LA up to £1,030,000 in 2018/19 and £1,055,000 in 2019/20.

The original increments between 2006 and 2010 were perhaps too high but the subsequent reductions were overly harsh and certainly contribute to the current problems. Even under the banner of ‘austerity’ it is not fair to fluctuate the figures in this way for people who are encouraged to plan their pension provision. One thing is for certain; the values now are worth considerably less than when all this started back in 2006 when there were transitional protections for existing investors under Fixed Protection. Those protections required the individual to make a personal application under the original rules and that had to be completed by April 2012 as far as we are aware.

Fiddling with Pension Simplification

There is an interesting document on the web referring to the previous paragraph’s topic – “Royal London Policy Paper 31”. Your blog enthusiasts would do well to review it. It appears that pensions simplification which was supposed to have been the basis for a stable position on pensions for some time to come has been “fiddled with” year by year by the government and resulted in the ‘usual’ ultimate chaos.

Eleanor’s CAB work intimates that at present, where tax charges arise, these are being paid by the Health Authority employer. That is unhelpful in almost every fiscal aspect of the problem, quite apart from any moral intimations. We are not sure what the situation is for a consultant with private earnings which may be the cause of the individual’s problem.

In principle we do not really feel that if an individual is earning in excess of £100,000 then a tax liability should be paid by their employer. Therefore the tax position needs to be reconsidered and made simpler by government diktat for all earners; not just a favoured group by subterfuge. If the answer was the elimination of higher rate tax relief against pension contributions; that would remove the anomalies from TAA and if this was combined with an increase in the LA to at least £1,500,000 and AA to at least £50,000 as the new bases with future inflation proofing, it would help resolve some of the issues.

NHS problems go deeper

Then this comes back to the first comment relative to healthcare which is massively underfunded both for the NHS and long-term care areas. Chronic health conditions in later life tend to fall between the NHS and residential care or home support (long term care).

However long-term care is effectively required to be funded by local authorities in England, depending on the means testing of an individual’s assets. Only in certain circumstances is it paid for by the NHS. Local authorities have had their funding cut on a regular basis so that there is a problem to be thought through.

The reallocation of money no longer used for pension tax relief (if high rate relief was removed) does not necessarily automatically help long term care as it will be in a different pot, national government coffers as opposed to Local Authority coffers.

Further thoughts

A tax change may assist the NHS but has any consideration been given to the fact that the collective pots of money in private pensions, funded on the basis of long term and (prior to pension freedom introduction) known exit dates, provides liquidity to the majority of large commercial entities through loans and share ownership without which many of those enterprises tasked with future development and employment growth would be severely impaired? Or perhaps THAT may be the political target? We could not be that cynical, could we?

Those are our thoughts on the documents under discussion.

Eleanor Downie FCII, ChIP. and Terence P. O’Halloran FCII, B.Sc., ChFP.