Pensions - Articles - The Budget’s £5bn raid on pensions and a Trojan Horse

 The Chancellor has taken the family home out of tax by increasing the effective Inheritance Tax threshold to £1 million. The giveaway is paid for by reducing the tax relief on pensions for people earning more than £150,000.

  

 The line is that people have worked hard for their homes. They should be able to pass them on to their successors, on death. If we have to hit fat cat pensions to achieve this, so be it.

  

 However, the hit on pensions exceeds the cost of the IHT giveaway, by quite some margin. In fact, the manoeuvre results in a gain to the Exchequer of £2,400m. (The reduced tax relief nets the Exchequer a cool £4,000m to £5,000m over 6 years; yet the IHT giveaway costs only £2,630m).

  

 And it turns out the threshold for being affected by the reduced tax relief on pensions is £110,000, not the £150,000 trailed in the headline announcements.

  

 The question now being asked is whether trust in the pensions has just got better. Many think not, saying manoeuvres like this diminish trust and damage the incentive to save.

  

 Yet the Chancellor launched a consultation on more fundamental reform of pensions tax, citing the need to strengthen the incentive to save. Pensions could be treated now like ISAs. People understand ISAs. The tax incentive is clear and simple to understand. Clear and simple incentives are needed to encourage people to save for their retirement. Therefore, perhaps pensions should be converted to the ISAs tax system.

  

 However, that argument ignores the truth that clear and simple doesn’t necessarily equate with better. An ISA type pension loses the tax advantages of the tax free lump sum. No tax free lump sum? That doesn’t sound much like an incentive.
 Moving to an ISA tax system brings forward tax receipts for the Exchequer. It also takes higher rate tax relief away from all higher rate taxpayers but only give tax relief at that rate to those of them whose pensions would also be taxed at the higher rate. The Centre for Policy Studies suggests replacing support for occupational pensions with a workplace ISA would save the Exchequer perhaps £10billion per year [briefing note 3 July 2015 Michael Johnson.*

  

 Let’s hope that the stated aim of incentivising people to save isn’t a Trojan Horse precipitating a more general raid on pensions.

  

 Summer budget 2015 – Big on pensions!
 Although we had an inkling about what would be in the budget, there are some surprises. A full review of the way pensions are taxed is in the offing. Tapered tax relief will present some administrative challenges. But no changes yet to abolish salary sacrifice schemes, although the government is actively monitoring their effect on tax receipts.
 
 Here is a summary of the main points affecting pensions.
 
 Annual allowance
 From April 2016 the annual allowance will be tapered for those with adjusted annual incomes (including their own and employer’s pension contributions) over £150,000. For every £2 of adjusted income over £150,000, an individual’s annual allowance will be reduced by £1, down to a minimum of £10,000.
 Those with income, excluding pension contributions, below a £110,000 threshold will not be affected.

  

 Taxing pensions like ISAs?
 The government has published a consultation paper on whether there is a case for reforming pensions tax relief to offer savers greater simplicity and transparency. Pensions could be treated like ISAs - with no relief on contributions, but tax-free investments and payments, but the government could top up pension contributions.

  

 Pension and savings flexibilities – Pension Wise, exit penalties and secondary annuity market
 Pension Wise will be made available to those aged 50 and above. A nationwide marketing campaign will raise awareness of its services.
 The government will consult before the summer on making pension transfers easier. The government will consider imposing a legislative cap on exit penalties for those aged 55 or over.
 The government has agreed to delay its proposal to allow annuities to be sold on the secondary annuity market until 2017 in order to ensure consumer support is in place.

  

 Taxation of pensions at death
 As previously announced, the tax rate that applies on lump sums paid from the pension of someone who dies aged 75 and over will be reduced from 45% to the marginal rate of the recipient from 2016/17.

  

 Lifetime allowance
 As previously announced, the lifetime allowance will fall from £1.25 million to £1 million from 6 April 2016. Transitional protection for pension rights already over £1 million will be introduced to ensure the change is not retrospective. From 6 April 2018, the lifetime allowance will be indexed annually in line with CPI.

  

 Public sector
 The government will work with Local Government Pension Scheme administering authorities to ensure that they pool investments to reduce costs.