Is the pensions industry suffering from legislative and consultative fatigue? Perhaps that is the reason for the muted response to the tax changes first announced in April last year and made more invasive in December’s pre-budget report?
Despite the fact that we still await legislation for the permanent changes, a tired sense of resignation is palpable. Industry talk is of alternatives to pensions; EFRBS, share incentive schemes and cash compensation (to be invested in VCTs et al).
Yet these changes go to the very heart of what pensions are all about – deferred pay. The golden principle that says that you get tax relief today, in return for tax you pay tomorrow, is about to be broken. Will we all just sit and watch it happen?
In addition to breaking the rock that pensions are built upon, these changes are excessively complicated. More than once, I have had to refer back to the examples in the consultation document to try and figure out how these rules work. What does the £130,000 include? What happens to any part of the contribution above £130,000 but below £150,000? And so on.
The Treasury might argue, without even the merest hint of irony, that tax relief is still available at 20 per cent. But most advisers have already worked out that even allowing for tax-free lump sums, 20 per cent on the way in, followed by 40 per cent or 50 per cent on the way out, is not exactly the best deal around. Hence the talk of resurrecting exotica.
Although the proposed solution is unpalatable, I do understand and have sympathy with what the Treasury is trying to achieve. They are skint, big time. They need to raise a few billion here and a few billion there, and pensions have to play their part.
That 1 per cent of the working population claims a quarter of all pensions tax relief is also difficult to defend. This group is therefore most able to contribute when the hat is passed round.
The problem is the way that the Treasury is going about this. These rules appear designed to deliberately evict high earners from pensions. The same people who currently make up half or more of the members of trustee boards. The same people who determine pay and benefits for the rest of us.
No one knows what the consequences of this experiment will be. Those who have worked in the industry for years are virtually unanimous in their judgement. They think that once the high earners leave, in April nextyear, pension schemes will be dumbed down to the lowest common denominator. From 2012, that means a woefully inadequate 8 per cent of band earnings.
And what of the public servants. The tens of thousands of doctors, surgeons, GPs, senior police officers, dentists, headteachers and a few in the Treasury itself no doubt. Are they aware that they will have to stump up an extra £2,000 or £3,000 a year in lost tax relief on their own contributions.
And, what about the annual demand for £10,000 plus, representing the 20 per cent to 30 per cent tax charge levied on employer contributions to pension schemes, including public sector ones? Some of these people will be surrendering almost a quarter of their gross income just to stay in the pension scheme. A career public servant in their early 50s earning £200,000 will pay extra tax of £3,400 on their own contribution plus another £15,000 on their employer contribution. I wonder if they’ll notice, that their spending money is £1,500 a month light?
When this gets out into the open, after 2011/12 self assessments are submitted, there will be outrage. And rightly so. Because the way these changes work are blatantly unfair.
There are other ways of skinning this cat. One such method would be to cut the annual allowance for all to £50,000. Some in the industry reckon that this would raise the same £2 odd billion as the changes proposed. The annual allowance was designed for this very purpose. It is the safety valve that allows the treasurer to cut the amount of tax relief being doled out.
HM Revenue and Customs is consulting over these changes until 3rd March, but the consultation concentrates on the detail of these complex changes.
It is not the detail that is the problem, but the changes themselves. This is an issue worth making an effort over. The industry needs to find its collective will to live and quickly because this will be on the statute books earlier than usual due to the impending general election.
Go on, let’s give ourselves a shake and at least put up a good fight.
