Now, the pensions world is calling for a long-term plan to create stability and encourage people to save. The topic will be just one of the subjects under debate at Birmingham-based conference Workplace Pensions Live on 13 and 14 May.
Since 2010, the amount that individuals can save tax-free into their pension pots over a lifetime has nearly halved from £1.8m to £1m, while the annual allowance for tax-free contributions has fallen from £255,000 to £40,000.
The most recent changes were in the Budget in March, when Chancellor George Osborne cut the lifetime allowance from £1.25m to £1m.
Osborne said that 96% of pension savers would be unaffected, but many in the pensions industry dispute that figure. “Our suspicion is that it will be more,” says Hugh Nolan, chief actuary at JLT Employee Benefits.
“It is a punitive tax for those who have saved well and done well on investments,” says Nolan. “People who have, say, £700,000 are now worried that, having scrimped and saved, they could pay a lot of tax if their investments do well. It seems backwards to take away from those who have planned over 20 or 30 years.”
Nolan says the move won’t just affect millionaires, but those on modest retirement incomes, too. He points out that £1m of pensions savings would buy an index-linked, joint annuity of a relatively modest £30,000 a year.
And there is no end in sight for the tinkering. The political party manifestos were published in April with a plethora of new ideas to take away tax relief from wealthier pension savers.
Labour reiterated a long-standing commitment to cut tax relief for those earning more than £150,000 a year from 45p to 20p to fund cuts to student tuition fees and a jobs scheme for young workers.
More surprisingly, the Conservatives would launch another raid on tax-free annual allowances. From April 2017, the party would introduce a tapering system. Those earning more than £150,000 would be able to put £40,000 a year into their pension pot tax free but it would fall to just £10,000 a year for salaries of £210,000 and above.
The policy is designed to raise £1bn in revenue in order to fund an inheritance tax cut allowing a £1m family home to be passed on tax free.
Meanwhile, the Liberal Democrats, whose MP Steve Webb has held the position of pensions minister for the past five years, called for a review of tax relief in their manifesto.
It states: “[We will] establish a review to consider the case for, and practical implications of, introducing a single rate of tax relief for pensions, which would be designed to be simpler and fairer and which would be set more generously than the current 20% basic rate relief.”
Webb has long supported a flat rate of relief and has previously floated 33% as his preferred level.
The dangers of tinkering
Many in the pensions industry worry about the long-term damage to savings policy of the constant tinkering and changes on tax relief by the politicians.
Bhargaw Buddhdev, a partner at pension consultants Barnett Waddingham, says: “Senior people can afford to pay for financial advice to deal with any changes but as the tax relief limits go down then it will start to have an impact on more people who won’t be able to afford advice.
“In addition, altering things is making it more and more complicated, and it means senior people that will lose interest. If they lose interest then they will lose interest in pensions for
With the next government still facing a £90bn budget deficit and £1.5trn debt, the pensions industry accepts that more cuts are coming.
Think tank the Centre for Policy Studies (CPS) calculates pension tax relief cost £52bn in 2013-/14. It is broken down as £27bn coming from upfront tax relief on employee contributions; £14bn from National Insurance contributions on employer contributions and salary sacrifice; £4bn from the 25% tax-free lump sum; and £7.3bn of investment income flowing tax assuming the basic rate of tax.
“The juiciest and lowest-hanging fruit in Westminster is pensions tax relief, which is also enormous,” says Michael Johnson, research fellow at the CPS.
“The three main parties have ruled out cuts to VAT and increases in income tax so they are left with no choice but to chip away at £101bn worth of tax reliefs on offer, with pensions being the largest.
He adds: “All parties know that any tax relief changes they make will have more losers than winners so they tinker. The way they minimise the political damage is to focus on a narrow band of people each time. It is clear tinkering.”
Johnson favours the merging of ISAs and pensions tax wrappers, with clear and generous tax advantages for savings. He says: “None of the parties are thinking about a big plan to boost saving in Britain. No one has asked how effective tax reliefs are and they do not know.”
Workplace Pensions Live will take place at Edgbaston Cricket Ground, Birmingham on 13 and 14 May 2015. The conference is free to attend for pension managers and trustees and other qualifying pensions and HR professionals – to find out more and to book visit www.workplacepensionslive.co.uk
This article was written by Samuel Dale and first appeared on www.pensions-insight.co.uk
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