Pensions tax relief – an endangered species

The debates are hotting up over who will hold the balance of power in the next parliament.  With no party likely to gain a majority we will face a period of bargaining and deal-brokering in the days following the election until we emerge, blinking, into the uncertain light of a new coalition or minority government.

Whether it’s a red dawn or some other hue, one thing is clear – pensions tax relief is in for a hammering.

Dead as a dodo?

All three major parties have made some announcement on pensions tax relief in their 2015 manifestos.  The Conservatives plan to reduce tax relief on pension contributions for people earning more than £150,000 a year.  Labour have similar plans.  The Liberal Democrats have made no firm commitments, but will establish a review to consider whether or not to introduce a single rate of tax relief on pension contributions, set somewhere between basic and higher rate.

The minor parties have licence to be even more extreme.  Plaid Cymru pledged to end higher rate tax relief on pension contributions.  The Greens want to both raise taxes and cut in half the income tax and National Insurance reliefs on private pension contributions.  Indeed, in a Green world, there are no private pensions – all employers would instead be required to contribute to a new state earnings-related pension scheme.

So is higher rate tax relief going the way of the dodo?  It certainly seems that way.  Since 2010/11 Government has hacked away at the annual allowance, the amount you can save per year without incurring tax charges, and it now sits at £40,000 – down from a peak of £255,000.   Pensions have been an easy target for a government looking to balance the books.  With further cuts to the annual allowance likely to hit key public sector workers, higher rate tax relief is next in the sights.

It’s not all bad news – several parties have pledged to increase the tax-free personal allowance or the higher rate threshold, which might take the edge off.  However, with devolution also on the agenda, the prospect of different tax rates for Scotland and the rest of the UK, or Wales, pensions tax relief is set to get a whole lot more complex.

No surprises

Other than tax relief, the manifestos have, by and large, been all quiet on the pensions front.  There seems to be a lack of political ambition to continue the pace of the recent reforms.  Perhaps we are all due a breather!  There will be a little tinkering around the edges on the reforms passed in the last parliament, making sure they bed down properly.

Labour are focusing on hidden charges and getting the 'Pension Wise' guidance right, with support evident in the SNP and UKIP manifestos respectively.  Labour also want institutional investors to disclose how they vote on executive remuneration.

The Conservatives have recently announced plans to make pensions policy campaigner Ros Altmann a peer if they form the new Government, where she would be appointed minister with responsibility for financial consumer protection and financial education.  Altmann would lead a review of financial fairness for consumers, including pension charges and the Pension Wise guidance.

The Lib Dems would like to look at encouraging people to save more through auto-enrolment.  This is likely to take the form of 'automatic escalation', under which members pay a higher proportion of their salary each time they receive a pay rise – the idea being that they don’t miss it in their take-home pay.

Finally, a referendum on Europe could have knock-on effects on pensions in the event of the UK voting 'out'.

State pension costs continue to rise

As the population ages, the unfunded state pension will cost more and more of taxpayers’ money.  Recent governments have attempted to reduce the cost – by increasing the state pension age, or reducing individuals’ reliance on the state for pension income by initiatives such as auto-enrolment.

The 2015 manifestos seem to push back the other way, with the majority of proposals relating to the state pension leading to increased cost.  All three major parties want to continue the 'triple lock' on the state pension, with the Liberal Democrats wanting to legislate to make this permanent.

The minor parties again are looking for more.  The SNP want to review plans to increase state pension age beyond 66, saying this would disproportionately affect individuals in Scotland.  Plaid Cymru want to increase the New State Pension to a 'living pension' set at least at the rate of the current Pension Credit.  The Greens would increase it still further, to £180 per week for a single person, and restore the link to increases in average earnings.

UKIP seem to be alone in suggesting a cost-neutral policy of allowing people to access their state pension at an earlier age, subject to a reduction.

We remain concerned that politicians are giving mixed messages. We are collectively not saving enough for retirement, yet we are benefiting too much from tax relief.  Auto-enrolment is designed to encourage people to start saving for their retirement, yet there is still considerable uncertainty about the level of state pension they will receive.  Whoever forms the next government, we need joined-up thinking from DWP and the Treasury, and a real long-term focus on pensions as savings for retirement.