Yesterday’s “Tax-Day” came and went without a headline grabbing announcement on personal tax relief. I liked this reaction published in Professional Pensions
Quilter tax and financial planning expert Rachael Griffin said the announcements were “a bit of a damp squib, much to the relief of the nation’s personal finances”.
She continued: “Savers and investors can now breathe a sigh of relief that the inaugural ‘tax day’ has passed with no major proposals to change rates or reliefs in future. Instead the Treasury have focused on ‘behind the scenes’ changes to improve the administration of the tax system and to build a modern tax system.”
We have yet to have time to analyze what these “behind the scenes” changes will mean but as they involve reforming “scheme pays” they will be of enormous interest to those in the nation who don’t depend on personal financial planners, but on occupational pension schemes. Similarly, changes to the taxation of superfunds are likely to impact who pays our corporate pensions – corporate trusts- multi-employer schemes -insurers of the PPF. Again the impact ends up being personal.
The slightly myopic line taken by the personal finance lobby ignores the fact that most of pension assets and all of pension liabilities still fall outside the ambit of wealth managers.
Bigger fish to fry?
Some would say that relative to the big three concerns of government – Brexit- Climate and Covid- issues around the misalignment of pension tax-relief are small beer in the batter.
I had a conversation with several Treasury officials last week on this. One of the questions on my list of questions was “why was it so hard to implement the outcomes of the 2015/16 pension tax consultation. At the time we had been promised a root and branch overhaul of pension taxation focusing on the tax relief on contributions, investment and outcomes of pensions.
Nothing substantive came of this because of the impending vote on Brexit and nothing has come of it since as Government majorities thinned and then when we returned to a powerful Government in late 2019, along came Covid. We are now digesting the impact of Brexit as well as working out what happens next with the pandemic.
The disruption of reforming tax-relief should not be underestimated. The Treasury officials explained some of the consequences in changes for which there are currently inadequate resources to patch remedies. There simply aren’t enough financial fire-fighters in Whitehall to manage the transition to a new taxation system.
No big idea from the left
This is the Treasury’s story but I suspect that there are counterfactuals which are important too. It is now 11 years since we had a Labour administration and in the 13 years under Blair and Brown there was no serious attempt to reform pensions. The Labour party has been a damp squib in the debate on pension taxation and its ineffective policies have meant that in opposition, coalition and power, the Conservative mantra of self-reliance and freedom of choice have developed unchecked.
What if we had had a Labour Government and a Labour party committed to pension reform?
I suspect that we would have a system of EET for basic rate tax-payers or even TEE where tax relief on contributions was replaced by tax free pensions (and a system that realigns incentives towards pensions rather than wealth).
The big ideas from the left – an improved state pension, the maintenance of open DB pensions and the introduction of CDC to provide a mass market alternative to “wealth management for all” are all Conservative introduced or maintained policies. The only policy initiative from the Labour administrations of the first decade of the century to survive is the system of auto-enrolment.
As regards the debate on tax-relief, the Labour party hasn’t even got out of bed to campaign for those caught in the net pay anomaly. It has been left to Tory peers to make the running on justice for the low paid (mainly women) who are being denied promised incentives.
Making the best of a bad job
For nearly a quarter of a century, there have been rumors of change and in this time we have moved from a system of rules based pensions to wealth based retirement spending, free of almost any rules at all. Managing this transition has meant the introduction of wealth based levers , the AA, LTA and MPAA being the best known, but also the introduction of schemes pays to meet the needs of the well pensioned within public service schemes caught by these wealth taxes.
I did not get the impression from my conversation with the Treasury that if it was starting again, it would start here. It got here by accident and the current administration has inherited a tax system which is unfair to the poor and to middle England and particularly unfair to women . It is a system that rewards wealth and not pensions and it is patently not a system of insurance against old age. On all public policy tests, the system of pension taxation is a bad job but it appears to be a job that cannot be undone, the Treasury do not appear to have any plans (whatever the Telegraph has been saying) to re-open the can of worms they closed in early 2016.
Why pension raids are not the priority
Left leaning liberals like me, would like to see reform, even if it curtails personal reliefs (I pay higher rate tax). I know many like me – Steve Webb and Ros Altmann being two, who now favor reform – but neither -when pension minister – managed to get reform.
The Treasury were able to influence pensions and did so through the 2014 Finance Act that introduced Pension Freedoms. This wasn’t a pension raid on taxation, but a knee in the goolies for pensions which has mitigated the cost to the public purse of pensions by accelerating revenues from ill-timed drawdowns. The Treasury has its own agenda and it does have bigger fish to fry.
Pension taxation reform is immensely unpopular on Tory back-benches and does not appear a priority for a Labour party obsessed with chasing hidden charges, stopping pension scams and going after high profile pension villains such as Philip Green. In the absence of any big idea from Labour, there has been insufficient political or popular pressure on the Treasury to make substantive changes.
Finally, despite the howls of doctors, Ros Altmann and a few independent bloggers, the Treasury has found a way of making the best of a bad job.
There is now a new big idea, which could be called collectivism and bizarrely it is coming from a right-wing administration. This idea is about combatting Covid, Brexit and Climate Change by reflating the British economy by unlocking DC pension wealth. This big idea is supported by DWP and Treasury and is leading to the abandoning of the workplace default charge cap, a Beeching like purge on small DC pension schemes and the creation of mega- trusts that in Government eyes go far beyond the scale of even Nest.
This big idea has a big prize and in this context, messing about with pension taxation is a game not worth the candle.