Aegon’s Steven Cameron claims that now’s the time for targeted interventions, not tax tinkering or radical reform of pension tax relief.
Steven Cameron, Pensions Director at Aegon, (pictured) comments:
Pension Tax Relief Reform
“With so many pension priorities and changes being advanced, the Autumn Budget is not the time for a radical reform of pensions tax relief. A move to a flat rate of pensions tax relief, rather than the current system where relief is based on the rate of income tax paid would be far from simple to implement. It would be particularly challenging for defined benefit schemes and could mean medium to high earners including doctors in public sector schemes face big tax bills. It would only benefit the Exchequer if the cuts in incentives for higher rate taxpayers were greater in total than any increased incentive for basic rate taxpayers. There are no quick wins here for the Chancellor, change would be very complex and any savings for the Exchequer from less tax relief would take significant time to realise.
“In his Spring Budget, the Chancellor froze the lifetime allowance, the maximum an individual can save in their pension on a tax favoured basis. Over the 5-year freeze, growing numbers of medium earners as well as higher paid will hit the maximum they can save in a pension with tax breaks. This reduces the justification for making other cuts in incentives for higher rate taxpayers.
“Currently, the Government is pushing those running defined contribution pension schemes to make significant changes to where they are investing members’ funds to address climate change and to invest more in infrastructure and start-up companies to turbo-charge the economy. Reducing tax incentives for many pension savers risks sending out mixed messages.
Pensions tax tinkering
“Many a Chancellor has considered radical reform to pensions tax relief, before putting in the ‘too hard’ pile and embarking instead on a series of typically unwelcome pensions tax tinkering. However, there are some targeted interventions which would be particularly welcome around the Money Purchase Annual Allowance, ‘net pay’ schemes, the increase in the Normal Minimum Pension Age and auto-enrolment enhancements.”
Over 55s caught unawares by Money Purchase Annual Allowance
“As individuals seek to rebuild their retirement savings post pandemic, perhaps after a period out of work, many might need the flexibility to pay in larger sums. But the little-known Money Purchase Annual Allowance means anyone over 55 who has accessed their pension flexibly, perhaps to support them during lockdown, has a limit of £4,000 a year on what they and their employer can pay into a defined contribution pension. Many will be caught unawares and we’d welcome this being increased to at least £10,000 to give individuals more freedom to get their retirement planning back on track.”
Net Pay Anomaly
“The Government needs to deliver on its commitment to address the ‘net pay’ anomaly which means non-taxpayers in pension schemes which have opted to administer tax relief on what’s called a ‘net pay’ basis lose out compared to those schemes operating the alternative ‘relief at source’ approach. HMRC grants non-taxpayers in ‘relief at source’ schemes basic rate tax relief but their counterparts saving in net pay schemes receive nothing, which means they are effectively losing out. Resolving this would be a welcome ‘levelling up’ measure for the lowest earners.”
Normal Minimum Pension Age
“The Budget and accompanying Finance Bill provide an opportunity for the Treasury to drop or amend controversial proposals around how to implement an increase in the Normal Minimum Pension Age. This is the earliest age when people can typically access their pension and with a few exceptions, is due to increase from 55 to 57 from April 2028. But proposed transitional arrangements risk decades of complexity for pension schemes and their members.
“The Treasury has been seeking to ‘protect’ a small minority of individuals who are in schemes whose rules by sheer accident of history give an ‘unqualified right’ to take benefits at age 55. While well meaning, these protections would create horrendous complexity and multiple unintended consequences for little real benefit. The pensions industry is united in calling for a radical rethink to keep things simpler and fairer across the board, while helping pension savers understand their entitlements so they can plan for their future.”
