The reform of pensions tax relief is the hot topic of the moment and solutions, from the superficial to the more radical, are being offered to help us all to envisage a future with a fully functioning pensions system. Most notable for his controversial and always outspoken ideas is Michael Johnson, who featured as one of our key speakers at the DC Conference last week. He spoke extensively about his vision - 'one savings vehicle to serve the individual - from cradle to grave', focusing on a move from EET to TEE.
James Jones-Tinsley explores Michael's thought-provoking ideas about pensions tax relief reform.
The first time I saw Michael Johnson speak was at a Retirement Planning Conference in July 2010.
Somewhat coincidentally, the Conference was held just days after the Emergency Budget of the new Coalition Government, which had ushered in a number of far-reaching consultation papers on pensions.
"Johnson has continued espousing his ‘end pensions tax relief’ mantra . . . focused respectively on the replacement of income tax and NIC relief on pension contributions with a universal redistributive 50p incentive per £1 saved, and the creation of a 'Workplace ISA' and 'ISA Pension"
To set this in context, the event took place at a time when the Lifetime Allowance stood at £1.8 million and the Annual Allowance stood at – gulp! - £255,000, although it was clear that both were firmly on the Government’s radar, because of their proposed deficit reduction plans.
Johnson, a Research Fellow at the Centre for Policy Studies (CPS), talked about overhauling the taxation of pensions; moving away from the current ‘Exempt – Exempt – Taxed’ (EET) model to a ‘Taxed – Exempt -Exempt’ (TEE) model, and a fusion of pensions with ISAs. Sound familiar?
This ‘newsflash’ was met with a mixture of disbelief and incredulity amongst the assembled throng. And yet, only three months later, HMRC announced that the Annual Allowance was coming down to £50,000, and that we would all have to start straddling our Pension Input Periods (PIPs), which – certainly where I’m concerned - is never a pretty sight.
Since that time, Johnson has continued espousing his ‘end pensions tax relief’ mantra, and two Johnson-authored CPS papers released in April 2014 and five days before the Summer Budget (hmmm…), focused respectively on the replacement of income tax and NIC relief on pension contributions with a universal redistributive 50p incentive per £1 saved, and the creation of a 'Workplace ISA' and 'ISA Pension'1.
If you compare the contents of these two CPS papers with HM Treasury’s consultation document, released immediately after George Osborne sat down and Iain Duncan Smith stopped fist-pumping the air, you will probably conclude, as I have done, that Johnson has firmly got the ear of the newly-unencumbered majority Conservative Government. And Osborne, for one, is very keen to listen.
"Although salary sacrifice was not – as former Pensions Minister, Steve Webb, warned – sacrificed in the Summer Budget, we know that it is now in the Chancellor’s sights "
The consultation period has now closed and I hope that the outcomes of the consultation will be more than just a paper exercise to appease the pensions industry, and that the Government have not – as some commentators have opined – already made up their mind on the matter.
However, having shackled himself from increasing certain taxes and National Insurance Contributions in a pre-election pledge, the ‘low hanging fruit’ of pensions tax relief would provide Osborne with an accessible means of quickly raising much-needed extra revenue during this parliament.
Given that, in 2013/2014, the total bill for tax relief on pensions was – according to the Treasury consultation document – '…nearly £50 billion'2, this may prove to be a fruit too tempting to resist.
And although salary sacrifice was not – as former Pensions Minister, Steve Webb, warned – sacrificed in the Summer Budget, we know that it is now in the Chancellor’s sights and a move from EET to TEE would effectively kill-off this much-loved employee benefit; albeit ‘by the back door’.
One thing is for sure, if all of this does come to pass, there will be one individual sniggering to himself, as he watches his long-predicated vision finally being rolled out across the savings landscape.
Tee hee hee indeed!
This blog first appeared on Professional Adviser in August 2015
- 'Retirement saving incentives: the end of tax relief and a new beginning': Michael Johnson, CPS, April 2014 and 'Briefing Note: The Workplace ISA and the ISA Pension': Michael Johnson, CPS, July 2015
- 'Strengthening the incentive to save: a consultation on pensions tax relief': HM Treasury Command Paper 9102, July 2015