Malcolm McLean explores the further reform of pension tax relief on the present government’s agenda.
In his recent introductory speech to The Association of British Insurers, the new Secretary of State for Work and Pensions, David Gauke, said he didn’t “expect to see any fundamental changes to pension tax relief in the near future”.
A lot of commentators have interpreted this as meaning that further reform of the system of tax relief and allowances is probably off the agenda, at least for the lifetime of the present parliament – however long or short that may be with the existence of a minority government.
"I wouldn't expect to see any fundamental changes to pension tax relief in the near future."
But is it? I am not so sure, and there are several reasons to believe that might not be the case.
First of all, Mr Gauke was responding to a question from the audience and hadn’t seen fit to mention the topic in the speech itself - which as an ex-Treasury Minister, he might have been expected to have done.
Secondly, given his background and experience, he probably chose his words very carefully. How fundamental is “fundamental” and what does the “near future” actually mean in terms of timescale - plenty of scope for wriggle room if necessary?
Thirdly – and possibly most importantly – will the Chancellor of the Exchequer see it in quite the same way when he starts (assuming he hasn’t already started) getting down to the detail of his Autumn budget? Will he begin to worry about how he is going to balance the books, deal with the growing deficit and the myriad of other financial problems facing him?
It is a reasonable bet that the Prime Minister will be anxious to avoid as much political controversy as possible on the domestic front until after the Brexit negotiations are complete. This will mean that the increase in the national insurance contribution rates for the self-employed will not be resurrected and last election’s controversial topic of costs and provision of long term care will likely remain in the long grass.
In short, anything which might prove unpopular on the backbenches and might bring the minority government down will almost certainly be barred.
However, that doesn’t necessarily rule out something that we know the Government has toyed with previously: the abolition of higher rate tax relief on pension contributions. It depends how it is presented; although there are many more standard rate taxpayers than higher rate ones, about three quarters of the considerable cost of pension tax relief goes to the latter group. Therefore, a more equitable distribution of the reliefs available might be to move to a single rate for all taxpayers fixed at say, between 25 and 30%, thus providing a very worthwhile boost for lower wage earners without inflicting too much damage on the saving prospects for higher earners.
Similarly, as far as I am aware, Mr Gauke hasn’t said anything about allowances in his remarks during or after the ABI speech. There could be yet more adjustments to changes to the Annual and Lifetime Allowances, which the Secretary of State’s former home - the Treasury - seemed to take a delight in doing.
We have already seen a reduction in the targeted Money Purchase Annual Allowance this year from £10,000 to £4,000 and it is not beyond the bounds of possibility for the main Annual Allowance to drop from £40,000 to around £30,000 from next year.
"Let’s not get carried away with Mr Gauke’s soothing words. The proof of the pudding is always in the eating."
Likewise, the £1million Lifetime Allowance (LTA) could be cut back to perhaps as low as £750,000. The industry might object, but there would be little public opposition to either of these moves. The level of the allowances involved, even when reduced, would be viewed as way beyond the reach of the average person anyway - and therefore entirely acceptable for the Government to reduce them further if it was necessary to do so.
There are, of course, counter arguments to such an arbitrary approach - but that is not to say there isn’t scope for amending the allowances to make them more compatible. This is especially true for the LTA, which effectively caps tax relief at different pension levels for Defined Benefit (DB) and Defined Contribution (DC): £50,000 for the former and only about £28,000 for the latter. One way to bring these in line would be to increase the formula for valuing DB for comparison with the LTA from 20 times the annual pension to 30 times the figure.
Be that as it may, no matter how much the new Secretary of State may support the cause of consensus across the industry, the survival of a minority government – as we have seen with the liaison between the Conservatives and the Democratic Unionist Party – may trump this. Under pressure, a cash-strapped Chancellor may also have little option but to turn to pension’s tax relief as a means of raising the extra revenue required.
So, let’s not get carried away with Mr Gauke’s soothing words. The proof of the pudding is always in the eating and we may find out sooner than some may think just how vulnerable pensions really are in the present climate.