Pensions: Storm clouds overhead?
Will the Chancellor make significant changes to Pensions Tax Relief in his March Budget, and what should employers and savers do in the meantime?
In 2018 the (then) Chancellor of the Exchequer, Philip Hammond, described the costs of pensions tax relief to the state as “eye wateringly expensive”. And indeed he has a point.
Figures released by HMRC in 2019 suggest that the current reliefs amount to more than £43bn per annum, and that cost is actually rising following the successful Pensions Auto-Enrolment exercise last decade.
With such vast sums involved it’s really not surprising that this is a spending area which is regularly under review as part of HM Treasury’s annual budget planning process. So will Chancellor Sajid Javid focus on this area in his March Budget speech, and what will this mean for the pensions industry, employers, and pension scheme savers?
Change may well be overdue
Of course this is far from the first time that changes to tax reliefs have been mooted. Indeed the subject has been a staple of Budget media speculation for many years. So why hasn’t a significant change in this space yet taken place?
The reality is that in recent years the Government has been prevented from taking any major action in this area by a combination of circumstances and policy decisions. Items as diverse as the Pensions Auto-Enrolment schedule, the delicate coalition of Conservative and Liberal Democrats, the introduction of Pension Freedoms, and the EU referendum (and subsequent three and a half years of political hiatus) have all played their part in delaying any alterations in this policy area.
Yet the political landscape has now been definitively redrawn, with the Government holding a healthy working majority and a full five-year term to enact new policies. Add to this mix the economic uncertainties of Brexit, and it’s clear that change in this space may once again be on the Government’s agenda.
So what to expect? Will any changes be relatively minor tweaks to the current system, or will the Government be bolder and make wholesale alterations to the fabric of pensions tax relief?
Firstly it’s worth noting that, despite the challenges listed earlier, quite a lot of tinkering to the overall systems of pensions tax relief has been happening below the radar anyway.
The Annual Allowance and Money Purchase Annual Allowance have both been reduced in recent years, and the Lifetime Allowance for tax-relieved pension savings has been dramatically cut too (despite some relatively small increases recently). For a full listing of the current allowances please see gov.co.uk
Now it’s quite possible that this type of (non-headline grabbing) change might well continue. Yet the problem with such tweaks is that they add to the confusions of an already complex system, making it ever more difficult for savers, employers, even the Government itself, to comprehend and comply with the requirements.
It’s also worth noting that the current system is also seen by many as being manifestly unfair. In 2015 a Government review suggested that over two thirds of pensions tax relief was going to higher and additional rate taxpayers. Nor is there even equality across savers in the same tax brackets. For instance the very lowest paid might – or might not – automatically receive a basic rate tax credit to their savings depending on the employer’s choice of pension scheme for their employees.
The reality is that the system has probably reached a tipping point. It follows that some reform and simplification is probably required to ensure the Treasury spend is producing the best outcomes for both savers and the nation. So reform of pensions tax relief may be a case of when, not if.
When & how?
But the “when” is important. Will changes be announced in the 2020 March Budget speech, or will the Chancellor hold-off until 2021 given the more immediate logistical challenges of Brexit (a subject that is absorbing vast amounts of Civil Service and private sector resource at present)?
And if changes are announced, how much lead-in time will be given? All parties will need a reasonable amount of time to ensure that everyone has a chance to understand, communicate, and comply with such important edicts before they go live.
Should employers be taking action?
So change in this space is probably to be expected, even if whatever comes next is still rather difficult to gauge. But is there anything employers can or should be doing now?
It’s a tricky question to answer, but in the absence of any concrete information to the contrary, it’s probably sensible for employers and employees alike to continue to take full advantage of the current system of pension tax reliefs if it appears in their interests to do so.
In the short-term this should ensure that savers benefits from the often generous tax-reliefs currently available regardless of what may - or may not - be announced and enacted in future tax-years.
Or, more bluntly, it’s a case of making hay whilst the sun is still shining.
Steve is Head of Benefits Strategy, Howden Employee Benefits & Wellbeing, and is an award-winning thought leader on Pensions, Employee Benefits, and Human Resources issues. He is occasionally accused of making Employee Benefits interesting.