A budget for pensions that are “victims of their own excess”

Today is budget day and by lunchtime we will know whether the strong rumors that the Lifetime Allowance and Annual Allowance will be adjusted upwards are true. We will also know if the less palatable options around increasing the minimum normal retirement age or restricting tax-free cash, have substance.

Everyone is  pretty clear that the Chancellor wants to do something meaningful for the high earners in the NHS pension schemes and  this is part of  a budget about getting people like me back to work. I took part of yesterday off to watch the joyous Cheltenham Festival but resumed work at 5.45pm. many people like me don’t need to work but do. It was not long ago that we were being talked of as blocking the career paths of younger generations by hanging around, now we are being coerced back into the workplace for our senior skills. Many of us in our fifties and sixties are a little more confused than the Chancellor!

This blog sets out my understanding of what is driving thinking in the Treasury and how I see the mood of the country. I’ll start with the thoughts of Paul Johnson which are not far from mine

Messing with popular expectations at 55 (NMRD and TFC)

Last night “pensions” made it onto agenda of radio 5’s “up all night”. Not one of the callers talked about tax or even pensions (other than the state pension). I suspect that pension taxation is an issue that impacts a relatively small band of savers. The conversation is about retirement, what it is and why it happens earlier than in previous generations. While I tried not to over-politicize what I heard, it became clear that there is a general awareness that 55 is the point that retirement is legitimate if not a right.

This is an expectation that has been set through Government policy and it is one I suspect that Jeremy Hunt and both Treasury and DWP ministerial teams, regret. If the Chancellor looks to move the goalposts on when money can be taken or how money can be taken, he will be messing with

For many people, releasing “trapped” money in their pension at or around 55, is a life-event. It’s often to pay off debt or to buy a new kitchen but it’s also the trigger for encashment of the pot that means there is money to live on.

Any tinkering with the minimum normal retirement age (beyond what is already in plan) or tax-free cash entitlements is likely to hit a wall – that will be a red wall, a blue wall- an orange wall. It will stir opposition from all shades of politicians – mindful of the financial planning of ordinary people.

Add to this the uncertainty people have about when they can take their state pension and there is the potential here for an omnishambles. Getting the messaging right and public acceptance of the trade offs around tax and pensions spending would help the Chancellor with his “getting people back to work” agenda.

Messing with the pension – recycling tax (MPAA)

The fear is that many have accidentally made rejoining a workplace pension more expensive through an obscure variant of the annual allowance called the Money Purchase Annual Allowance (MPAA)

The MPAA is probably the limitation most broken by savers and is not much discussed other than by pension professionals . Experts like Steve Webb think that most people who pay over £4,000 pa into their pension who have triggered the MPAA have no idea that they are incurring a penal tax rate and live in ignorance till HMRC’s real time information  finds them out.

I suspect that a great deal of tax-relief is being paid and claimed in error. However, were there no MPAA, there would be an opportunity to recycle, already tax advantaged pension withdrawals and claim more tax-relief. The MPAA debate is really about inadvertent tax evasion and knowing tax-avoidance.  I very much doubt that more than a tiny fraction of those not at work and over 55 would behave any differently if the MPAA was raised to £10,000 (or abolished). The Chancellor may consider this is a limitation best left alone, it is the least contentious of the allowances and is a ticking time-bomb , but it’s one for another Chancellor – and  another Government.

Messing with the Annual Allowance

There is very little research among the over 55s in the general population  about whether tax-incentives make any difference to working practices.

But thee is a concentration of evidence  from the public sector that accrual of final salary or career average defined benefit schemes is currently huge. This is because of the impact of inflation and wage earning on future benefits, which can often mean future pension increases smash through the annual allowance triggering immediate tax demands. These demands can be deferred and paid out of a reduced future pension through a system called “scheme pays”, but it’s clear that public sector pensions are making their beneficiaries “victims of their own excess”.

The Annual Allowance will almost certainly increase and will be justified because of the bulge in benefit accrual this year. But in reality, it – and the annual allowance taper which is a kind of super-tax on the super high income, are very vulnerable to change. They don’t bring in enough revenue to justify the hostility from senior public sector workers – especially senior doctors. The political fall out from cries of “pandering to the rich” can be countered by “support for the NHS”. The Annual Allowance (and probably the taper) are likely casualties, but only as part of a wider settlement on NHS pay. This isn’t anything to do with “fairness, adequacy or predictability”, it’s all about the bigger picture.

Messing with pension death taxes

A change in pension taxation that is entirely acceptable (to me) , is a change in the IHT treatment of unspent pension pots. The current favorable treatment encourages people to keep their pot unspent. This may be good news for tax planners and wealth managers but is not aligned to the common purpose of pensions which is to encourage the spending of the pot as retirement income.

Moving pension wealth in line with other wealth would encourage the transfer of pots to pensions (whether annuity or CDC). It would also encourage the active use of drawdown from a pot.

If this is a price to pay for reforms in other areas, so be it.

Messing with the LTA

I can understand the need to reform the AA, to ignore the MPAA and the temptation to mess with minimum retirement ages and tax-free cash.

But I can’t see why the LifeTime Allowance has become the headline tax reform – linked to getting people back to work.

Perhaps this is because I am still working, still paying into Nest and in breach of my protected lifetime allowance (accepting that I will have to pay lots of tax in future but might as well have something more to pay that tax on).

It looks like pension rich people like me (I practice what I preach) are gong to get a huge bung for persisting in saving and a whole load of people who haven’t been saving into workplace pensions are going to have the opportunity of paying one off “catch-up” contributions into their workplace pensions or SIPPs. If the LTA goes up from £1m+ to £1.8m, that means a gift to the wealth management industry (and a smaller gift to workplace pensions).

But it will be paid for out of general taxation and while I can see it as popular on the back benches on the Tory party , I don’t see it as having anything at all to do with “adequacy, fairness or predictability”. The OBR will have waved it through but I suspect it will be flagging that the move will severely limit pension tax concessions in other areas – in future years.

I speak as someone who will be a big beneficiary of this change in saying that I don’t understand why I am being so well-treated.

DB pensions -victims of their own excess?

The DWP mantra is “adequacy, fairness and predictability” in private pensions. These are the tests I’ll use to see if Jeremy Hunt’s taxation tweaks are in the country’s interests or in the interests of his Government’s political chances in a future election.

This looks like a budget that will reward people who have what the bulk of the population would consider excessive pensions. This is not part of the levelling up agenda for DC , it moves DB pensions into an even more advantaged space.

I suspect that pension giveaways will be at the expense of proper subsidies on child-care which costs this country much – especially in the loss of female labor (and female independence through pensions).

But I am likely to be a lone voice in questioning the need to increase the LTA or not to increase the MPAA. The real reforms we need in private pensions is to reverse the negative impacts of pension freedoms which are one of the reasons for 800,000 over 50s being lost to the workforce.

The structural reforms we need for the private pension system are to improve their value for money and to create an architecture at retirement that allows people’s pots to turn to pensions in a popular way. We need private pensions but not the excess of guaranteed pensions.

About henry tapper

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