It is becoming increasingly apparent that both the Treasury and the Office for Budget Responsibility have failed to spot the immense hole the freedom and choice policy creates in the public finances.
In its response to a Corporate Adviser Freedom of Information Act request for information on the costings and assumptions used in the formulation of the policy, the Treasury has said nothing that reassures me that it was fully aware of all the ramifications of this policy.
This magazine requested details of the assumptions made as to increased use of pension rather than salary for remuneration when calculating the effect of the policy – a strategy that would cut the state’s tax take by over £3,000 for each £10,000 channelled through pension. Without stricter controls on recycling the policy gives everyone over age 55 an extra £2,500 income tax allowance and £10,000 exemption from employer and employee NI – with four times this amount of relief available in the first year.
The budget papers set out an increase in revenue of £320m in 2015/16 rising to £1.2bn in 2018/19.
Clearly it has made some assumptions to get to these figures – namely that somewhere south of £3bn more will be taken out through flexible drawdown in 2018/19 than would have been the case if people were using annuities or old-fashioned drawdown, and that income tax will be paid on these sums.
But the Treasury has no response to the question ‘did it spot the salary sacrifice issue’ other than ‘go and look at the budget papers’ – specifically the budget Policy Costings document.
If this is all the Treasury has to say on the issue, we can deduce it has completely missed the issue of salary being flushed through pension. In fact the budget papers spell it out.
The Policy Costings document focuses solely on the number of people who access their money early. The statement ‘this leads to an increase in income tax received in early years as individuals will now pay tax on the withdrawals from their pension pot’ is the only post-behavioural costing factor referred to by the Treasury in the entire paper, other than a single line that says ‘adjustments are also made for the higher costs of pensions tax relief to reflect the increased attractiveness of pension savings for some individuals’.
The idea that the Treasury completely missed the £24bn salary sacrifice loophole when it developed the policy – scary as it is – is emphasised by the fact that under the Policy Costings document’s heading ‘Areas of uncertainty’, reference is only made to the number of individuals making use of the new withdrawal facility, with no mention of the number of employers that could use it to cut their payroll costs.
The document then goes on to make the massively ambitious claim that the policy ‘results in increased income tax receipts in each year until 2030’. I am surprised that more questions are not being asked of the Treasury’s abilities in this area.
The aims of the policy are just. It has sparked a wave of product development that will mean more people will be invested in assets that are more suitable for their needs for longer periods than would have otherwise been the case. And few are crying for the system that will be left behind.
But we need a sustainable structure – not something that will be torn to bits weeks after next May’s general election.
The prediction of rising tax receipts simply cannot be accurate. If one tenth of the £24bn or so tax relief that has been made available is taken up, then the government will lose out. It is crystal clear that this new framework, that so many people are working flat out to facilitate next April, will not survive in its current form. I’d give it a year at a push, and then we will have to think this all through all over again.