There’s been a non-stop flow of suggested pension policy reforms for the upcoming Budget. Some are radical suggestions, others more of a tinkering with the small print. Many would be complex to implement, particularly in relation to DB schemes, with some taking years to introduce. Below are some options potentially under review, including my prefered suggestions, which could deliver for pension savers, the Treasury and the wider economy.
One way to reduce annual spending on pension tax relief is to limit how much people pay in. The Chancellor could reduce the annual allowance (currently £60,000) or make changes to the tapered annual allowance (applyied to those earning over £200,000) or the £10,000 Money Purchase Annual Allowance (applied when you take more than tax-free cash from a pension). Alternatively she could reduce or remove carry-forward rules, which allow people to mop-up previous year’s unused annual allowances.
Changing any of these would be relatively simple (at least for DC), save money for the Chancellor immediately, and only hit higher earners. These changes are also easy to understand and administer. However, higher-paid DB scheme members, such as senior NHS staff, could face significant tax bills, if large pension accruals each year push them over these limits. There’s the option to only apply changes to DC, but that would anger higher earners in private sector and would likely attract negative media headlines.
Another option is reducing what can be taken as tax-free cash. There have been strong rumours around this, with some suggesting the current maximum of £268,275 may be cut to as little as £50,000. Such rumours have prompted some to take this tax-free cash while they can, although this may be in their best long-term interests if such changes don’t transpire..
From the Chancellor’s perspective this change could release significant sums, without hitting those with more modest pensions. But such a draconian retrospective change risks damaging confidence in pension savings. It also disadvantages those needing these funds to pay off a mortgage or other debts.
There’s also the option to impose NI on pensions in payment. Again, this could raise significant sums, with average pensioner income £21,000 a year, but currently only subject to income tax. The Chancellor could introduce a new NI pension levy, potentially lower than the standard rate, and portray this as a move of inter-generational fairness, a popular theme popular with the Government. This could be seen as breaking manifesto promises though not to increase tax, NI or VAT — and would upset millions of pensioners.
In my view, a more obvious option for the Chancellor is to use tax relief on pension to invest in the UK, a quick way to boost investment into British assets, helping with economic growth, at no additional cost to the Treasury!
My proposal would be to require at least 25 per cent of all new pension contributions to be invested in UK quoted companies, venture capital, start-up capital and real assets, such as infrastructure, property and alternative energy. Pension funds in all other countries invest with a significant home bias – most have well over 20 per cent or 25 per cent in domestic assets. UK pension funds used to have around 50 per cent invested here, but this has disappeared in recent decades with most schemes focusing overseas.
If providers want to invest more overseas they are free to do so, but would not receive help from British taxpayers. This is not mandation, it is a quid pro quo for receiving the taxpayer support.
Finally the Government could introduce a new tax on pensions that bypasses IHT. This could replace what I think will be a disaterous move to :impose IHT on unused pensions from 2027. This rule, announced at the last Budget is likely to to cause chaos for those trying to wind-up estates, not least in trying to identify all relevant pension assets, get up to date valuations, prove their own identity, establish who will inherit these assets, and calculate and pay the correct tax due within a six month period, before HMRC imposes 8 per cent interest on oustanding tax due.
Instead the Chancellor could levy a new tax on unused pension benefits, administered outside the IHT system and paid by the pension provider. This could be set at say 10 or 20 per cent, and applied to all unused pensions, regardless of whether the estate falls into the IHT net. It would be a straightforward to collect and would raise extra revenue for the Chancellor.