OpinionJul 24 2013

Sweeping changes are afoot for tax relief on pensions

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Pensions tax relief in its current form is undoubtedly living on borrowed time. The attacks are now coming from all sides: Labour, Tories, the TUC and the Pensions Policy Institute.

But in proposing cures for the perceived ills of pensions, these groups must be very careful they do not end up killing the patient.

The UK had the best private pensions in the world. By 1967, private sector occupational schemes had 8.1m active members.

Most employers have now abandoned them following two decades of government interference and plundering, regulator dabbling, some disappointing returns and a few shocking decisions.

In proposing cures for the perceived ills of pensions, these groups must be very careful they do not end up killing the patient Tony Hazell

Last week the Office for National Statistics published figures showing active membership of private sector occupational schemes had fallen to 2.9m in 2011.

Never mind, we are told, you can save for your own pension and benefit from the wonderful tax relief on your contributions.

But that is not happening either. Between 1999/2000 and 2011/12 the number of men contributing to private pensions fell from 9m to 7m, while the number of women contributing fell from 6.8m to 6.5m, according to the ONS.

Now the PPI is arguing that the tax benefits are not well understood. The institute also argues, somewhat dubiously in my opinion, that “there is limited evidence around the effectiveness of tax incentives in encouraging pension saving”.

It says that a single rate of tax relief – probably 30 per cent – would be fairer. I would not dispute that.

But it is not just higher-rate relief under attack; it is the tax-free lump sum too that the PPI suggests could be restricted, perhaps at £36,000.

Add to this the fact that 40 Tory MPs are calling for the abolition of higher-rate tax relief and major changes after the next election look inevitable.

I suspect that once they start to look at abolishing higher-rate relief, MPs will find it almost irresistible to restrict it to the basic rate of income tax.

They will be facing a bigger tax-relief bill if auto-enrolment helps to push up contributor levels.

Scrapping higher reliefs altogether should even cut the relief bill overall.

But this raises the question of what the highest earners will do with their money.

In the longer term fewer people are likely to be higher-rate taxpayers in retirement. To get a £40,000 income with any sort of inflation protection you are likely to need to have saved £1m.

Furthermore, the limits on how much can be saved are being reduced. So, there will be less incentive and less room for higher earners to use pensions.

I suspect, therefore, that we will see more people turning to that old staple of property. This will drive up prices further and make life tougher for first-time buyers – who, in turn, will have a choice between paying the mortgage or saving into a pension. And we all know which they will choose.

Bid farewell to Jupiter’s Gibbs

So farewell then Philip Gibbs and thanks for making so much money for me and your many loyal investors while at the helm of Jupiter’s Financial Opportunities fund.

Between June 1997 and June 2010 it produced a return of 792 per cent compared with the 38 per cent for the FTSE Financials index during the same period.

And thanks to Kean Seager of Whitechurch, who mentioned the fund to me as one to watch, during a very long lunch.

It all went so well until Jupiter tried to fix a formula that was not broken by adding Guy de Blonay to the mix.

And, because I am feeling laid-back today, I will gloss over Mr Gibb’s tenure at the Jupiter Absolute Return fund that has returned absolutely b****r all as far as I can tell.

Demise of IFAs premature

The siren voices that predicted disaster for IFAs following the RDR can now cogitate on the interim results published by Frenkel Topping showing a 20 per cent rise in profits in the first six months of this year.

Funds in its investment management service increased by 17 per cent to £521m – and the chairman’s statement said that client retention was at an all-time high.

Ok, so the firm’s specialist area is personal injury damages and clinical negligence awards, which for various reasons is booming.

But this does suggest that reports of the demise of the IFA sector may have been rather premature.

Tony Hazell writes for the Daily Mail’s Money Mail section t.hazell@gmail.com