Aon is backing flat rate relief as the front-runner outcome of the pension incentives consultation, with the pension Isa model second most likely.
In a light-hearted look at the options open to the Treasury, Aon Hewitt senior partner Kevin Westbroom has given his odds on the likely outcome of the consultation, due to be unveiled in this year’s Budget Speech, which coincides with horse-racing’s Cheltenham Festival.
Wesbroom says: “Rebadging tax relief as incentives seems the obvious winner – and a chance to slip in a few billions of tax savings. It also offers a chance to throw in a few positives, for example, opportunities for younger savers to access pension benefits and older savers to put aside funds to provide for older life. But there are also a few negatives such as restricting tax free cash to a monetary amount to give a truly winning combination. A horse like this could end up with just three legs – and still win the Pensions Stakes!”
Flat Rate – starting odds 2-1
“This was always our favoured runner. There are plenty of variations available under this system and Aon’s preferred approach was to move away from talking about tax relief to giving pension incentives. So would you rather have a 33 per cent tax relief – or a system where there is a direct financial incentive with a £1 match from the Treasury for every £2 from employee or employer contributions up to a limit?
“It seems pretty clear that higher rate tax payers will be losers under this approach, and they will be sacrificed on the altar of greater incentives for the masses – or the need to raise finances overall. Double taxation (higher tax in receipt of a pension than the flat rate relief) may be an issue – but only for a very small population. This route allows both tax raising and extra savings incentives – surely a winner for all! Payroll and pension administration systems will scream – especially when DB schemes are included – but surely we can all cope with an April 2018 implementation date?”
Johnson’s Time for TEE – starting odds 3-1
“The ISA-style tax system was an early favourite and seemed to be attracting a lot of attention from the Treasury. The obvious attraction is that pension tax relief is accelerated by a generation – or one (current) generation can gain a huge tax windfall – but to the detriment of future generations of tax payers.
“This approach may be hugely attractive to the Chancellor, but would it really achieve the stated aim of encouraging more people to save? The Aon view has been that TEE only works if significant upfront incentives are offered – which would take this perilously close to an EEE system for most tax payers – so not that attractive to the Treasury. Although it’s been getting a lot of backing in the press recently, we – along with other tipsters – feel this beast just doesn’t have the staying power to make the distance.”
Sacrifice Salary Sacrifice – starting odds 4-1
“It’s become increasingly clear that the Treasury really dislikes this horse and sees salary sacrifice as tax avoidance on a massive scale and wants to close this stable down. The trouble is, if they are not careful when they close down this loophole they will make the whole idea of pension savings massively unattractive. Many employers could just give up and move to a position of paying the AE minimum. That would really mean this horse just ends up unseating its own rider.
“We know this runner has become a favourite in recent years, but the question has always been how to reconcile the objectives – and how to deal with defined benefit schemes in a pragmatic way? We are hearing whispers that the answer will be to apply NI contributions on pension contributions, but to use a lower rate – say half the standard rate of NI contributions. This would show a clear advantage in pension savings over cash, but would still net the Chancellor the odd few billion. And then the method of valuing DB schemes could be much more rough and ready – surely one to appeal to the general public?”
Cash Gone – starting odds 20-1
“This is a classic and popular runner – it seems to have been in the Budget stakes for ever or at least since one of its trainers called it “the anomalous but much loved tax free cash lump sum.” Nobody can quite remember why it exists – but it is massively popular with the punters and it would be a brave man to bet against it. It is likely to be placed and be ready to run again – unless it gets taken down by another faller such as Johnson’s Time for TEE.”
Shrinking Allowances – starting odds 60-1
“This has been a four times winner in the last six years, and so cannot be discounted. Will the Chancellor just continue to reduce the Annual Allowance and Life Time Allowance? Remember, at one stage they were £265,000 per annum and £1.85 million respectively. Can it be that they are down to just £40K pa and £1m before this race?
“As a runner, this is probably past its prime – even Red Rum only won the National three times – and any further tweaks to the annual or lifetime allowance will leave confusion, administration and annoyance in their wake.”
No Change Charlie – starting odds 80-1
“This outsider was heavily backed by the CBI, but the reality is that the Chancellor is likely to need to get some more tax from pensions to make the overall Budget sums add up. It’s hard to say you have increased the incentive to save if you do nothing. So I see this as an early faller during the race.”
Scrappy Chappy – starting odds 100-1
“It would have been wonderful if the Chancellor had listened to the pensions public and decided that his proposed system for a phased Annual Allowance for 2016/17 was so unworkable that he should withdraw this runner. General opinion from those in the know is that this horse is not suited to this race. Despite that, it is still on the race card. We can only hope that fails to come under starter’s orders – its removal would be a nice fillip to the pensions industry, and might be used to sweeten an otherwise nasty pill to swallow?”