In the first part of this series, let’s deal with the past
First, let’s deal with the past.
A July 2015 consultation entitled Strengthening the incentive to save: a consultation on pensions tax relief considered whether and how the current tax relief system could be changed. While the consultation recognised the importance of saving for retirement, it asked whether the complex tax relief system was actually a disincentive to saving. However, it was blatant in its admission that the current system is costing the Exchequer £billions in “lost” revenue.
The consultation looked at the current EET tax relief system:
• Exempt – where contributions by individuals are exempt from tax at their marginal rate of tax (20%, 40% or 45%). Employers are also exempt from income tax, and employer contributions are also exempt from National Insurance contributions (NICs) – though total contributions are subject to both an annual allowance (AA) and a lifetime allowance (LTA), including the taper from April 2016.
• Exempt – where no personal tax is charged on investment growth from pension contributions while in accumulation, subject to the LTA.
• Taxed – where payments of pensions are taxed as income, though individuals may be able to take a portion as a tax-free lump sum on retirement.
The consultation then went on to talk about possible reform options, indicating that these had to be within the framework of being simple and transparent, allowing individuals to take a personal responsibility, building on the success of auto-enrolment while being sustainable for the future. One suggestion, widely anticipated, was that tax relief at the point contributions are made could be restricted to a flat rate rather than the individual’s marginal rate. For example, a flat tax relief of, say, 26% would benefit people paying tax at the basic rate while restricting tax relief for those that paid at the higher or additional rates. The EET system would still operate, meaning that tax relief would be given at a flat rate but taxed at the marginal rate when the pension is paid.
Another of the suggestions was to move to a TEE system, where:
• Taxed – contributions are taxed upfront, i.e. there would be no tax relief.
• Exempt – with no tax being charged on fund growth (as now).
• Exempt – where payments from the scheme on retirement are paid free from a tax liability.
The consultation was open until 30 September 2015.
Prior to Budget 2016, there was widespread industry speculation the then chancellor, George Osborne, would end or change the way in which individuals get tax relief on pension contributions. A Treasury source was quoted at the time that it was “not the right time”. Did this mean that it wasn’t the right time with an upcoming EU referendum in which the government wanted a Bremain vote? Regardless of the reason, no change was announced, though there were some pension announcements including:
• Delivery of a pensions dashboard by 2019, so individuals can view their pension pots in one place.
• Introduction of the Lifetime ISA (LISA), giving a new savings vehicle with government bonuses.
• A consultation on a £500 pensions savings allowance that will allow individuals to withdraw up to £500 from some pension pots free of tax and use it to obtain financial advice.
• An increase to the existing £150 income tax and National Insurance relief for employer-arranged pension advice to £500 from April 2017.
• Confirmation that salary sacrifice is still on the government’s agenda for reform, though sacrifices for pension saving would not be targeted.
In the next instalment, I’ll deal with the present situation.