Who pays the pension bill? HMT asks awkward questions

Posted on November 6, 2022 by henry tapper

The cost of incentivising us to save into pension plans

The Telegraph is floating a story that the Chancellor is considering scrapping higher rate tax-relief (currently reducing the cost of paying a pension contribution by up to 45%) so that there is a universal incentive to save , based on a lower amount (probably the current base rate of income tax – 20%).

Of course, around 1.4m savers don’t get the 20% incentive because they are saving into the wrong kind of scheme, something that doesn’t seem to have concerned most higher rate tax- payers, but even floating the story is causing palpitations amongst the mass affluent

As the Telegraph article is behind a paywall, they are running it on Twitter as a thread so I’m able to share it full on this blog. I’ve interspersed for some thoughts from me.

The accrual of pensions in this country is mainly a matter of paying national insurance than tax , as can be seen from this diagram that shows that most pensions are paid by the state out of money allocated to the DWP by the Treasury

Most of the occupational pension accrual is from public sector pensions, cutting tax-relief will – for public servants , mean they bear a higher proportion of their pension provision. Money saved to the exchequer could be used to fund inflation linked pay-rises to low-earners such as nurses.

In the private sector, pension saving is mostly into DC plans. Ironically, those auto-enrolled into DC workplace pensions are only required to pay contributions on earnings below the higher rate tax threshold. The vast majority of the “wealth” being built up in workplace pensions is from higher earners who bag most of the available incentives.

What was discussed (and discarded) by George Osborne in 2016 could have resulted in something as radical as a move from EET to TEE, to a universal incentive at somewhere between 20 and 40%. It was said to have been unpopular with Tory back-benchers, it would have been operationally difficult to implement. It was put in the “too difficult” box at a time when there were more pressing political imperatives (the BREXIT vote).

 

The flags have been thrown, this autumn statement is going to piss people off. Either those people are going to be spending their pensions or saving for them. Perhaps you can find a balance where you piss everyone off equally, this would create a  kind of equality of annoyance which might unite the country and parliament.

The core voters for the conservative party appear already to have been alienated (judging from opinion polls). The Prime Minister and Chancellor may consider that this alienation is “baked in” and that they have nothing to lose by legislating for a fairer taxation system for pensions.

In practice, this could be sold to the public as a way for making 5 million of the wealthier in society , pay their way on pensions after years of getting the majority of the hand-outs.

Bizarrely, this is precisely what the Labour party failed to do when they had the opportunity in the early years of the century.

This argument will carry little weight in the Treasury. The success of auto-enrolment is that it works on inertia. All the evidence suggests that , left to their own devices, people do not desert auto-enrolment for lack of incentives (witness the 1.3m who save while not getting a 25% kicker promised but not delivered). There may be some opt-outs of workplace pensions and some scaling back of voluntary contributions but this is unlikely to   decrease savings.

And reducing the incentive to “over-save” into workplace pensions, should reduce pressure to enforce the annual allowance , a real problem for doctors in the NHS and a political problem Jeremy Hunt knows all about. Would doctors be prepared to sacrifice higher rate tax relief for the scrapping or even raising of the annual allowance?

Why is this story being floated now?

The Treasury have a habit of floating stories prior to a budget to gauge popular reaction.

I think it unlikely that this change will be made because of the operational complexity of implementing it within this parliament. Most of the problems surround the availability of salary sacrifice to most schemes, which allow employees to have their contributions paid for them by employers. Reducing tax-relief on contributions would accelerate a shift to salary sacrifice unless the Treasury could find a way round this. That’s the rabbit that they need to pull out of the hat to make this idea effective.

There is precedent, the abolition of compulsory annuitisation that we know as “pension freedoms” was but a tiny tweak in the taxation legislation surrounding the drawing of DC benefits. But it has brought the Treasury considerable income and left many people satisfied that they aren’t constrained by legislation as to how they take their savings.

That these stories are circulating is not unusual, there are always pre-budget scare stories on pension incentives, but what is different this time , is that the Treasury really does need to create savings to get the OBR to sign off on the Autumn Statement

And even if this is no more than a rumour, it has made us think about the kind of hard choices that Government is having to take.

Expect pension policy to be at the heart of the autumn statement.  Who takes the pain has yet to be decided. Much of the financial and political stability that this Government hopes to regain, will depend on that decision.

 

 

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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