If I were pensions minister . . . The urgent need for reform

Estimated reading time: 3 minutes

A general election to remember 

Guy Opperman had a good general election last December. The constituency of Hexham in Northumberland (recently voted the happiest place to live in the UK) voted to retain him as their Member of Parliament by a majority of 10,549.

Following the election, he retained his role as Minister for Pensions and Financial Inclusion and celebrated this on Twitter, pictured with his horse called Bob.

As an amateur jockey Mr Opperman will have relished the Conservative Party taking full advantage of the ‘first past the post’ electoral system – and romping home with an 80 seat majority.

With the first Budget of the new, emboldened Government now set for 11 March, I am putting myself into Mr Opperman’s riding boots. I’m going to set out what I believe he should insist the chancellor includes in his red box on Budget Day.

The need for pension reform 

In October and November 2019 we held some more of our popular events for advisers, under the banner of 'What’s Brewing – On Tour.' This combined tours around craft beer breweries in Leeds, Birmingham and London with sample tastings and a ‘pensions hot topics’ talk delivered by myself.

We held these tours against a background of the prorogation of Parliament, ruled illegal by the Supreme Court, together with the calling of a general election. I was forced to amend my notes numerous times during the tour!

One constant remained, however. This is my assertion that the pension tax rules have become over complicated and beset with tax traps and unintended consequences. The enthusiastic support from the assembled advisers suggested a high level of agreement on this. 

What is needed is a root and branch review, ideally overseen by an independent commission of pension experts, to usher in a far simpler and fairer taxation regime.

  • Scrap the annual allowance for defined benefit (DB) pension schemes. The complicated, ‘behind the scenes’ pension input amount calculation is what has caused NHS clinicians and other public sector workers to suffer significant excess tax charges.
  • Simplify the annual allowance for DC pension schemes, by equating it with the annual allowance for ISAs.
  • Scrap the lifetime allowance. Its austerity-led reduction during the previous decade has turned it into a tax on successful investment performance, whilst its valuation difference between DB and DC schemes can lead to excess tax charges arising after a DB to DC transfer. For DB schemes, replace the lifetime allowance with a more realistic ‘ceiling’ on pension accrual, akin to the pre-A Day Inland Revenue maximum benefit limits. 
  • Simplify pension tax relief. Introduce one percentage rate of relief for everyone at a level that encourages basic rate income tax payers to save into pensions, whilst not significantly worsening the current position for higher and additional rate taxpayers. A flat rate of, say, 33% could also provide the opportunity for memorable and understandable soundbites; e.g. “you pay in two, you get one free.”
  • End the ‘net pay’ versus ‘relief at source’ inequity in workplace pension schemes. It disproportionately affects those on the lowest earnings from a financial perspective and may therefore lead to scheme opt-outs from the auto-enrolled.
  • Stop taxing initial pension drawdown income on an ‘emergency code’ basis. As well as generating a mountain of paperwork from aggrieved voters, in order to recover overpaid tax, the overpayments amount to more than £535 million since April 2015, according to HMRC data.  

With 'Brexit paralysis' hopefully behind us, calmer parliamentary conditions now offer an ideal opportunity to make the reforms to the pension tax regime that are so desperately needed. With our real-world pensions minister in mind, we shouldn’t look this particular gift horse in the mouth!

For more information about any of the topics discussed, please contact your usual Barnett Waddingham consultant or get in touch here.

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