The torrid complexity associated with pension taxation could persist if a hasty decision is taken. The next step should be a full consultation on refined options, giving ample time for the nuances of a revised regime to be identified. Any outcome should seek to establish a stable long-term structure, ideally with cross-party support, with a realistic transition period allowing advisers and those affected to handle the changes.
In 2006 a “long term” overhaul to the taxations taxation was put in place. Since then there have been numerous changes to limit tax relief mostly focused on high earners but having a wider impact.
In March of this year, the ACA published a Policy Paper entitled Creating a Sustainable Pensions Tax Framework. That paper set out many of the problems that exist in the consequent current framework - a raft of complexities and anomalies that possibly even HMRC could no longer fathom - an incomprehensible tax regime was in urgent need of fundamental reform.
It is clear a move to a TEE environment (and to some degree a move to a flat rate approach) with its bringing forward of tax charges and potentially reducing tax relief would have many attractions for the Government, in a world where pension tax relief costs will increase as the auto-enrolment system matures.
However, the ACA response to the Treasury consultation makes it clear that such a change would bring a significant administrative burden and remove many of the reasons that employers cite for providing pension arrangements and their attractions for employees.
The complexity would be felt particularly by Defined Benefit arrangements and this may be another factor in some employers closing the last few schemes offering such accrual. On the macro level, it would lead to a very substantial segment of the future community (i.e. pensioners) being tax-exempt which may be divisive – so would the regime last?
With the success of auto-enrolment, and the increased numbers now contributing towards retirement saving for the first time, the ACA says it is critical that a new pension system does not dissuade those currently saving from doing so and ultimately will encourage those saving to save more.
Commenting on the response, David Fairs, Chairman of the Association of Consulting Actuaries (ACA), said:
“Within the confines of the existing structures of Income tax and National Insurance it is clear to us that each option considered in the consultation paper will solve some of the issues that exist with the present system but will create others.
“If we are to have a credible long term incentive structure for retirement, whatever is put in place for the future will need to be stable. The constant changes to the current system have seriously undermined a savings structure established in 2006 which was largely welcomed by all.
“The changes under consultation could represent a real “revolution” in pension provision, following closely on from the Freedom and Choice changes announced in 2014 and in force from earlier this year. We welcome the review of the tax structure but any proposals should be subject to full consultation and with sufficient time to implement.”
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