The Pensions Schemes Bill, announced in the King’s Speech 2024, will require pension schemes to offer retirement products, so people will have “a pension and not just a savings pot when they stop work”.
This is not a quotation from this blog but a statement issued by the Government for what the Pension Schemes Bill will bring
The bill will do this by placing duties on trustees of occupational pension schemes to offer guided retirement products to members, including “a retirement income solution or range of solutions” and “default investment options”.
In a long article , Professional Pensions picks up the story
The bill followed the Conservative government’s consultation on a policy framework for supporting individuals on how to use their private pension savings at the point of access – Helping savers understand their pension choices – which was published in July last year.
But when it comes to solutions to the issue of a “default investment option”, the pensions industry seems as divided as it was when it was first asked to come up with a default investment option at the onset of Stakeholder pensions a quarter of a century ago.
Alyshia Harrington-Clark says the trade body is “super supportive” of the new duties – noting they were in keeping with the PLSA’s policy position of what it calls “guided retirement income choices“.
She explains: “We think that is quite important, because, if you speak to people and asked them what they need and what they want, they say: “I want a bit of everything”. Currently, that is quite difficult to do because you have to go out and buy everything separately, whereas the kinds of options the government is describing give you a basic route that doesn’t require you to do a lot of complicated decision making, which enables a good outcome for members.”
“Things like delivering a route for people that haven’t taken an active choice so that something good happens to them, rather than nothing or something bad happening to them because they haven’t taken an active choice. This has become more important post pension freedoms.”
Harrington-Clark adds the PLSA has also been supportive of another initiative the government is talking about in “blended solutions”, which are products and solutions that cover the different needs people will have in retirement – such as access to cash, or a long-term income.
Back in my house, we call the need for “blended solutions” – cake ism. We are sceptical that in an under saving environment, ordinary people will have the luxury of such sophisticated options, most people (80%) told a Scottish Widows survey that they just want a consistent income that lasted as long as they did and value for their family if they died before that income paid out.
This vague thinking is echoed throughout the article. Sophia Singleton tells us
“Different people do have different needs, so it’s not going to be right for everyone, but they are about avoiding foreseeable harms, we’d like to put in perfect solutions for everyone, but since we can’t, but we can at least protect them from stuff that we know might be harmful.”
Aon is equally vague
Aon DC partner Jit Parekh says the measures unveiled by the government represent a “welcome addition” and explains they didn’t come as a “massive surprise” – given it represents a continuation in the direction the Financial Conduct Authority (FCA) and Department for Work and Pensions (DWP) have been moving in for a while. Combined with the focus on value for money (VfM), consolidation in DC and looking to unlock more investment from schemes into the economy, he says it all follows the “right path”.
What isn’t defined is what the “wrong path” is and if there is a “right path” why is it so hard for ordinary people to find it. I have recently been through the process of trying to withdraw a quarter of one of my pots to pay off my mortgage. Following that path has taken me so far nearly four weeks, I have no certainty what my tax-free cash will be and I’m certainly no nearer knowing what Legal & General think I should be doing to “turn my pot to pension”.
Patrick Heath- Lay bemoans the lack of direction People’s Pension can offer to its millions of members. Heath-Lay
says the “complexity” regarding decisions savers have to make around decumulation mean the majority will not be in a sufficiently strong position to understand the strengths and weaknesses of the “myriad” approaches or options open to them. He adds that, due to the range of options available to members, it is not a surprise to see “sub-optimal” decisions being made.
While it is clear that people want to be liberated from their pension freedom, nobody is very clear who is going to take the risk of doing that. David Robbins of WTW warns
“To push people into a product, which kind of includes a cautious investment strategy alongside longevity pooling, seems difficult to mandate by default and obviously it would be portrayed as cancelling pension freedoms.”
It’s not clear what the product David is referring to is. Could he mean a collective pension or an annuity?
Aegon’s Stephen Cameron was sceptical of guaranteed and non-guaranteed pensions that pooled longevity, pointing to the fact that people live longer and shorter depending on what they do, where and how they live.
Standard Life’s Gail Izat sees all the tools as being at her disposal but struggles to see how she can use them
However, while insurers like Standard Life have got the building blocks to build innovative solutions for members, Izat says those solutions are “not just a product” and the days of providers selling a product to members that fulfil their needs in retirement are gone.
She explains: “This is about having the right products, having the right investment solutions, and having the right support, guidance and advice that we can wrap around the retirement journey… It’s only when those things all come together that you will really deal with sort of innovation in retirement.”
The picture is clearly not clear. The finest minds Professional Pensions could find to consider the answers can say only that the answer’s not here yet.
Sadly for the 700,000 a year of savers who are reaching the point when they want to turn pots to pension , we have yet to come up with a serious alternative to the annuity, failed to replace the company sponsored defined benefit pension scheme, failed to come up with something as simple and understood as the state pension.
This strikes me as either a failure of imagination or a failure of nerve. If the Government wants a way to turn pots to pension , it is saying it does not want a myriad of ways. We cannot be cakeist , we must be decisive. Innovation will come when a means to turn pots to pensions emerges. That is what I am setting my mind to and what you will be hearing a great deal more from me about.
The problem with funding retirement is that the State Pension is so meager that it has to be supported by ‘moving benefits’, a very uncertain position to be in! That forces us into private organisations to give support once we are unable with the flawed old age to work and protect us from inflation. The FCA should be overlooking this so that Company Trustee’s are held to account if they run into trading problems and start selling off their assets. That leaves their employee’s pensions, or deferred pensions, at risk as they are the last in line to claim any monies or transfer of their investment to any new owners etc.
What has happened. Last century with the interference of government i.e. Blair/Brown administration’s asset stripping forced company trustee’s to close their DB schemes in favour of DC or other methods. That left, on enforced closure’ all ‘deferred pensioners’ at risk. Hence in 2004 we had FAS at the mercy of The Treasury. There was no provision on company Trustee’s by the previous FCA to ensure that Deferred Pensioners were protected by offloading risk with recognized insurance companies or by guaranteed inflation protected alternative such as annuity plus!
There seems to be no obvious way of protecting vulnerable old age unless government accepts their obligation and comes up with a way ‘to fit the purpose’!
Over the whole population you will find a very large spread of the disposable income. You will not find a product that is suitable for all. Disposable income is critical in the accumulation years. See recent publication from ONS
In the financial year ending (FYE) 2023:
median household disposable income in the UK was £34,500, a decrease of 2.5% from FYE 2022, based on estimates from the Office for National Statistics (ONS) Household Finances Survey (HFS)
median household disposable income for the poorest fifth of the population increased by 2.3% to £16,400, partly because of government cost of living support measures; however, this figure remains 2.4% below FYE 2020 pre-coronavirus (COVID-19) pandemic levels
median household disposable income for the richest fifth of the population decreased by 4.9% to £68,400; this is 4.3% below pre-pandemic FYE 2020 levels
median household disposable income decreased by an average of 0.3% per year between FYE 2020 and FYE 2023, compared with a longer-term average increase of 0.8% per year over the 10 years leading up to 2023 (FYE 2013 to FYE 2023)
mean household disposable income for the richest fifth of households was six times greater than the poorest fifth households (£15,000 and £82,900, respectively), while mean weekly household expenditure was only two times greater, likely contributing to greater financial resilience for richer households
disposable income inequality decreased from 35.5% in FYE 2022 to 33.1% in FYE 2023; this is the largest year-on-year decrease since 2011, affected by an annual increase in income for the poorest fifth of households and a decrease in annual income for the richest fifth of households
DC is the future DB will survive where the risk is with the State.
Conversion to income is the annuity and if you want a sizeable company to assume the risk then it will pay you less than your could probably do for yourself with drawdown, IF you have the capacity to understand what you are doing.
Thinking about the design of the range of products three elements would suffice using my own model they are:-
Phase One I have secured basic living costs with annuities. I could not get the PLA (from 25% commencement lump sum) or pension annuity with Joint life RPI linked.
Phase Two Then I have drawdown at 3% for the discretionary spend. Cash flow model to age 104.
Phase three Third there is the differed element to cope with emergency events not considered in earlier phases.
I have the advantage of 50 years as an adviser.
With all the complexities I now have a financial adviser so I am still learning and I will probably need re-educating after the 30th budget. Hopefully they reduce the tax subsidy on contributions over time (4 years) down to 20% tax relief and redirect some of this saving to help those in greatest need.
Many may not be prudent (lucky) enough to get past phase one. Most of the 6% who took advice get to phase two.
I have shared a note from a meeting today where we were asked to consider budget optiosn. If the concensus is right then pensions are the target
The sources primarily focus on potential tax increases the UK government could implement to strengthen public finances. While they don’t explicitly list 30+ sources, they offer a comprehensive overview of various options, categorised as follows:
I. Income Tax:
Reducing Income Tax Thresholds: Lowering the income thresholds at which the basic (20%) and higher (40%) rates apply could generate significant revenue. For instance, a 10% reduction in the personal allowance would yield £10 billion annually, while a similar reduction in the basic-rate limit would bring in £6 billion. [1] This builds upon the existing policy of freezing these thresholds, which is already projected to increase tax revenue by £8 billion over the next four years. [1]
II. Pension Taxation:
Reducing the Tax-Free Pension Lump Sum: Currently, retirees can withdraw 25% of their pension pot tax-free, up to £268,000. Eliminating this benefit could generate £5.5 billion. [2] Alternatively, limiting the tax-free amount to £100,000 would raise £5.5 billion. [2]
Limiting Up-front Income Tax Relief on Pension Contributions: Pension contributions are currently tax-deductible. Limiting this relief to the basic rate (20%) or a higher rate (30%) could raise substantial sums: £3 billion at 30% or up to £15 billion at 20%. [3]
Ending National Insurance Exemption for Pension Contributions: Currently, pension contributions are exempt from National Insurance contributions. Removing this exemption would generate additional revenue. One option is to impose National Insurance on pension drawdowns instead. [3] The IFS suggests imposing employer NICs on employer contributions, which could raise around £17 billion per year before accounting for behavioural responses. [4]
Reducing the Cap on Tax-Free Pension Withdrawals: The maximum amount (£1,073,100) on which the 25% tax-free element applies to pensions could be reduced, though this might require phasing in over time to avoid issues of retrospection. [5]
Taxing Pension Wealth Upon Inheritance (under 75): Currently, inheriting a pension from someone who died before 75 is tax-free. Applying the standard 40% inheritance tax could raise £2 billion in the long term. [6]
Harmonizing Pension Inheritance Tax (over 75): When inheriting a pension from someone who died at or after 75, the pension provider deducts PAYE, which can be up to 45%. Applying the standard 40% inheritance tax rule would simplify the system and could result in a minor tax cut for some beneficiaries. [6]
III. Capital Gains Tax (CGT):
Increasing CGT Rates: Modestly increasing CGT rates, potentially to a maximum of around £2 billion, could be feasible. [7] However, larger increases risk deterring investment and require careful consideration of inflation indexing to avoid taxing inflationary gains. [7, 8]
Ending CGT Forgiveness on Death: Currently, capital gains tax is forgiven upon death, meaning heirs are only taxed on gains accruing after inheritance. Eliminating this “buy, borrow, die” loophole would generate revenue (estimated at around £1.5 billion before behavioural responses). [8-10]
Inheriting CGT Liability: Changing the law so heirs inherit the capital gains liability on assets, ensuring they pay CGT on the full gain when they eventually sell, would make the system fairer and potentially increase revenue. [10]
Implementing a CGT Exit Tax: Taxing unrealized capital gains when an individual leaves the UK, similar to how gains are taxed upon arrival, would close a loophole used by entrepreneurs to avoid CGT and make the system fairer, potentially increasing revenue. [11]
IV. Inheritance Tax (IHT):
Ending or Capping IHT Exemptions: Removing or limiting exemptions for business assets, agricultural property, and pension wealth could raise substantial revenue. Capping the inheritance tax exemption for pension wealth alone could generate between £100 million and £2 billion. [5, 12, 13] Ending exemptions for business assets and agricultural land could bring in around £2 billion, assuming no behavioural response. [12]
Taxing Large Lifetime Gifts: To address potential increases in lifetime gifts to avoid IHT after reducing exemptions, taxing large gifts (e.g., exceeding £1 million) could be considered. [13]
Increasing IHT Rate on Trusts: Increasing the current 6% IHT rate on trusts to 9% could generate over £500 million in additional revenue. [14]
V. Property Taxation:
Reforming Council Tax: Implementing a more progressive system by removing the cap on high-value properties or adding more bands could generate £1-5 billion. This could involve adopting a system similar to Scotland’s, which increased rates on higher-value properties (bands E-H). [15, 16]
Closing the SDLT “Enveloped Commercial Property” Loophole: Applying the standard 5% Stamp Duty Land Tax (SDLT) to the sale of high-value commercial properties held within single-purpose companies (instead of the lower Stamp Duty Reserve Tax) could generate over £1 billion. [17]
Increasing the Annual Tax on Enveloped Dwellings (ATED): This tax, designed to discourage holding residential property in companies, currently raises only £111 million. Tripling the ATED rate could raise a more significant amount. [14]
Taxing Capital Gains on Homes: While politically challenging, removing or limiting the CGT exemption on main residences could generate significant revenue (estimated at £31 billion if entirely abolished). [18] However, this would require careful consideration of exemptions and reliefs to avoid unintended consequences for the housing market.
VI. Taxes on Spending:
Reinstating Fuel Duty Increases: Reversing the recent cancellation of the fuel duty rise would generate £3 billion annually. Further increases beyond pre-planned levels could yield an additional £250 million for every 1% rise. [19] However, this would directly impact consumers, including “working people”. [19, 20]
Reviewing and Abolishing VAT Exemptions: Eliminating or reducing certain VAT exemptions, such as the 0% rate on children’s clothes, could generate revenue. Removing the children’s clothing exemption alone could yield around £1 billion. [19] This could be paired with an increase in child benefits to offset the impact on low and moderate-income families. [19]
VII. Other Taxes and Levies:
Limiting AIM Tax Reliefs: Closing the loophole that exempts AIM shares from inheritance tax after two years of ownership could generate around £100 million. [21]
Creating a New Tax or Levy: Following the example of recent years, where new taxes like the sugary drinks tax and environmental levies have been introduced, the government could create an entirely new tax targeted at a specific good, activity, or even as a way to bypass manifesto commitments by renaming an existing tax. [22] Resurrecting the health and social care levy, a National Insurance-style contribution, would raise around £15 billion annually with a 1% rate. [22]
Increasing Insurance Premium Tax (IPT): While not explicitly suggested in the sources, the article mentions that IPT rates have been significantly increased since 2015, surpassing inheritance tax revenue. [23] This implies potential for further increases, though the article cautions against setting rates too high and distorting the insurance market. [23]
Increasing Vehicle Excise Duty (VED): A modest increase of £5 to the average VED on cars could raise £200 million. A more substantial increase, potentially generating £1 billion, is achievable but would impact “working people”. [24]
Reforming R&D Tax Relief: Currently costing £7 billion annually, the sources express concern over the effectiveness and potential misuse of R&D tax relief. [25] By restructuring the relief to target “significant projects” in specific sectors like bioscience, engineering, and technology, while implementing stricter oversight and a pre-clearance process, the government could ensure the relief achieves its intended goals while potentially reducing overall costs and freeing up funds. [25]
VIII. Less Likely Options:
Taxing Gambling Winnings: While potentially generating £1-3 billion, this faces challenges regarding fairness (especially for professional gamblers), regressivity, and the need for a new tax collection infrastructure. [26]
Increasing Gambling Duties: This is considered less effective than taxing winnings but could raise more revenue (up to £2.9 billion) with easier implementation. [27]
Capping Tax Relief on ISAs: Capping ISA relief at £50,000 could save £5 billion annually but is seen as unfair due to changing the rules of a government-promoted savings scheme. [28]
Reducing the VAT Registration Threshold: Lowering the £90,000 threshold could raise at least £3 billion and potentially boost long-term economic growth but faces short-term opposition from small businesses and requires significant administrative changes. [29]
Raising the Top Rate of Income Tax: Increasing the 45% top rate, potentially back to 50%, is considered unlikely due to limited revenue potential and a potential breach of Labour’s campaign pledge. [30]
Implementing a Wealth Tax: While popular with some groups, wealth taxes historically face challenges with implementation, valuation, and avoidance, as seen with the recent Spanish wealth tax. [31]
Taxing Unrealised Capital Gains: Taxing gains annually, regardless of realization, presents significant challenges regarding valuation, handling losses, preventing emigration, and avoidance, making it unlikely in the near term. [32]
Introducing a Financial Transaction Tax (FTT): While potentially raising substantial revenue, a broad FTT risks disrupting financial markets. Existing stamp duty already acts as a transaction tax, making further increases questionable. [33]
IX. Unconventional Revenue Generation:
Adjusting Bank of England Interest Payments: The Bank of England could potentially generate around £5 billion annually by stopping interest payments on a portion of the QE bonds it holds. [34] This approach, while not strictly a tax, could free up government funds but requires careful consideration regarding potential impacts on interest rate control and who ultimately bears the economic burden. [34]
This list, while extensive, highlights the diverse range of options available to the UK government for increasing revenue. The sources emphasize the importance of balancing revenue generation with economic efficiency and fairness. Ultimately, the political feasibility of these measures will depend on public perception, lobbying efforts, and the government’s overall political strategy.