A Very Challenging Green Paper
In his ‘emergency’ budget George Osborne announced that he was open to “further radical change” in the pension system, suggesting that moving pensions “to an ISA-like system” was on the cards.
The move towards a taxation shake-up within pensions would not simply be announced, but rather a green paper would be issued which asks for input on the radical reform of pension tax relief.
Changing the current pension system to a Taxed, Exempt, Exempt system (TEE) would see pension contributions paid without tax relief given up-front, rather than the other way around - when consumers make withdrawals from their pension pot in retirement.
Scrapping tax relief on pension contributions on the way in, would bring forward tax receipts for the Exchequer and remove the advantages of withdrawing a tax-free lump sum.
Of course, future governments could change the rules again, resulting in double taxation on pensioners’ savings.
When announcing the consultation which would radically overhaul pension tax relief, the Government stated that it is “interested in views on the various options that have been suggested for how the system could be reformed”.
Like-minded advisers need to think very carefully about how they answer this consultation. They need to think not just in terms of their own client base, but in relation to the entire pensions sector. If pensions start to be taxed exactly like ISAs a key consideration needs to be that there will be no tax relief upfront and ISA’s unlike pensions do not force people to make monthly contributions or block access their fund until retirement age.
Pension savings must not be viewed as an available pot of money for cash strapped governments to chip away at.
It will be interesting to see how fellow advisers answer these eight questions that the Government wants answers to in relation to the current system and potential changes.
The eight key questions:
1.To what extent does the complexity of the current system undermine the incentive for individuals to save into a pension?
2.Do respondents believe that a simpler system is likely to result in greater engagement with pension saving? If so, how could the system be simplified to strengthen the incentive for individuals to save into a pension?
3.Would an alternative system allow individuals to take greater personal responsibility for saving an adequate amount for retirement, particularly in the context of the shift to defined contribution pensions?
4.Would an alternative system allow individuals to plan better for how they use their savings in retirement?
5.Should the government consider differential treatment for defined benefit and defined contribution pensions? If so, how should each be treated?
6.What administrative barriers exist to reforming the system of pension tax, particularly in the context of automatic enrolment? How could these best be overcome?
7.How should employer pension contributions be treated under any reform of pension tax relief?
8.How can the government make sure that any reform of pension tax relief is sustainable for the future?
However carefully considered our response to these questions might be, it seems to me that the wheels are already in motion and we are careering towards yet another monumental taxation shake up across the UK pensions system. I await the results of this consultation with huge interest.