It’s that time of the year again. Listen carefully to that whooshing sound in the sky – it is the sound of many kites being flown in the hope that one gets higher than the rest!
This year’s Autumn Statement, scheduled for 23rd November, is eagerly awaited in the pension world. Few of us would have predicted the events of the Summer and it seems a long time since George Osborne’s “Strengthening the incentive to save: a consultation on pensions tax relief”, which was launched in the heady days of July 2015.
This was quite a big deal! I think we all knew that at some time the tax relief provisions for pensions would come under question - it does seem wrong that higher earners should get higher incentives and lower rate tax payers get a lower rate of incentive.
The standard riposte has been it is deferred tax – it is not paid on income saved and then it is payable when that income is paid in retirement.
Indeed, this was specified in the introduction to the consultation. “At the heart of the current system is a simple principle: the contributions you make to a pension during your working life are tax-free, and you pay tax on them when you come to take your pension.”
But you knew there was a ‘but’ coming.
“However, recent years have seen a substantial increase in life expectancy. This has resulted in a shift away from final salary defined benefit pensions towards defined contribution pensions in which you and your employer save into a pot that you can access at retirement. With increased longevity and the changing nature of pension provision, the government needs to make sure that the system incentivises more people to take responsibility for their pension saving so that they are able to meet their aspirations in retirement.”
So let’s cut to the chase – we had the discussions on EET v TEE, pensions v ISAs, flat rate tax relief v no change – all of which would have required significant change in habit and in associated legislation.
The result – we were told that there was no consensus, further work to be done and we got the LISA. (The subtext, however, was ‘let’s wait until the Brexit vote is out of the way as we do not want to rock the boat – we can always come back to this afterwards’.)
The rest is history – “Brexit means Brexit”, the top table has changed and we are back at the starting line.
For me, the big question is, will we continue on the route started by George Osborne or will the new PM and Chancellor want to stamp their own mark on this as they have with many other subjects?
There have been a number of calls for a “no change pledge” to the legislation for a period of as much as 10 years.
We have had a call for a “pensions bonfire” from one financial planning firm, a call to scrap pension tax relief totally from another (to be replaced by an age-related bonus also designed by that firm). We have had continued call for a super ISA and we have had renewed call for an independent body to be in charge of savings strategy.
Pension tax relief is generous and yet it is not really working as an incentive - people don’t understand it. So, changing the amount or structure of pension tax relief is not going to help – people still won’t understand it, nor will they see the value in it.
The fact that pension legislation changes so often is the real bugbear and a deterrent for many people. They don’t like the idea of locking their money into a product where the amount they can contribute, the tax treatment and how and when they can access their money can change at any time, and often does. If the rules don’t change for a long period of time, people can get used to them and understanding will improve. It is the current lack of understanding, along with affordability, that stops people investing in pensions.
The big picture?
The demographics are still changing – we will have an ageing society with more people in receipt of pension than paying tax to pay for it. We will have a state pension that is designed to be above means testing level (perhaps with or without a ‘triple lock’). From the Cridland Report (recently published) we will be looking at the concept of state pension age – should it go up, ought there to be early access for some?
We must keep looking at this bigger picture – the cost of tax ‘incentives’ today as opposed to the cost of ‘benefits’ in the future.
This is a great chance to start from scratch and to stamp some authority on the savings system with simplification, understanding and a long-term view.
In the film Mary Poppins it was the realisation for Mr Banks that his family and the future were more important than the bank that led him to “fly a kite” – can we hope for a similar moment of clarity in November?