The Government appears to have decided not to pull the trigger on the plans to completely change the pensions system (at least for the time being). It emerged over the weekend that the Government were leaning towards the Pension ISA style system. This would mean that future pension contributions would be made after tax (with an undefined incentive from the Government for locking savings away until age 55) but those benefits would be tax-free when received. However, we can speculate that a potential revolt from fellow Tory MPs was feared together with an outcry from “middle England”. With the EU referendum in June and George’s own leadership ambitions it was felt that this wasn’t the right time to change the pensions system.
This does present the Chancellor with a problem with his Budget next week. He may have accounted for the £billions the Treasury was due to receive in unclaimed tax relief and now has a black hole to fill. This may mean pensions and employee benefits are not entirely in the clear yet.
Current potential areas of new focus:
- Employer financed retirement benefits schemes (EFRBs) have long been discussed as arrangement the Government do not like. These may finally be subjected to wholesale review.
- Salary Sacrifice has been mentioned in dispatches for a few years. While residing in the “too difficult” tray, the new black hole the Chancellor now has could, at least, be filled by amending the NI savings these arrangements make. The most likely is a change to the employer saving (clear in the knowledge that this will be unpopular) or a restriction to the level of salary sacrifice that can be used.
- Annual Allowance – could be reduced further for all from £40,000 or the Government could reduce the salary threshold and total income measured for the tapered Annual Allowance.
- Lifetime Allowance – could also be reduced further for all from £1m (although the Government has previously pledged not to reduce the LTA further). However, what is most likely? A change in the factor used for Defined Benefit pension schemes (currently 20) to something like 25 or 30 is possible. This would make them more comparable to DC fund values and the equivalent income. This could push many more in Defined Benefit schemes over the Lifetime Allowance. It is possible this would only apply to new pension benefits.
- Pension ISA, as briefly described above, could be rolled out for young/new pension savers as a slow way of introducing the system but having two codes running in parallel would be difficult in practice.
- Flat rate relief – remains the favourite to be introduced at some point in the future, although a 10-year lead in as suggested by one MP on Newsnight last week looks unlikely.
- Tax-free cash – this was always unlikely to change as it would prove massively unpopular and also not make much money in the short-term. What may happen is the future tax-free cash rights would be reduced as a function of the future taxation method on contributions.
It is possible that this is just a stay of execution for pensions. As we know the Chancellor effectively has two Budgets a year and by the time of the Autumn statement it is likely that the EU referendum (and fall out) will be understood and so any changes could be announced then. It isn’t clear what another six months of speculation and rumour will do for the credibility and stability of pension savings as the issue does not appear to have been completely abandoned by the Government.
Please note that the reduction to the Lifetime Allowance and introduction of the tapered Annual Allowance for high earners as previously announced are set to continue from 6 April 2016.
We must still watch the Budget carefully as anything could happen (a week is a long time in politics and pensions). It is perhaps disappointing that what is right for pension saving is not determined by a real and rational consideration of the facts but purely by politics.
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