PensionsAug 1 2014

Ex-shadow pensions minister calls for tax relief cuts

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Nigel Waterson, the trustee chairman of defined contribution master trust Now: Pensions and a former shadow pensions minister, has suggested that the next government will be forced to significantly cut tax relief on pensions in the wake of looming pension reforms.

Mr Waterson told FTAdviser that the changes to give people more control over when they access their pension will have many potential consequences. One of which is that tax relief on what will become a standard savings vehicle that is more widely used may be difficult to “justify”.

He said: “I believe the next government, whichever colour they are, will have a long hard look at present levels of tax relief.

“After all, if as a result of the Budget pension saving becomes just another medium term savings vehicle, rather than one designed solely to support people in retirement, is it possible to justify generous tax relief?”

Shortly after the Budget, the Centre for Policy Studies called for the current tax relief regime to be scrapped altogether and be replaced by a system that would see HM Treasury make a ‘contribution’ of 50p for every £1 of savings irrespective of taxpaying status.

The current system offers savers tax relief equal to their marginal rate of tax, meaning a £1 contribution to a savings pot costs a saver between 55p and 80p. Research from Prudential has found that more than £225m in pension tax relief is going unclaimed every year by higher rate taxpayers.

Another thing to be revisited following the next general election, according to Mr Waterson, is the pot-follows-member method of transferring DC pension pots between jobs and schemes.

“After the next election, I would hope that the new government reviews pot follows member as I think more work should be done to examine the proposal as against the aggregator model.

“One of the inevitable side effects of auto enrolment will be an explosion in the number of small and stranded pension pots. The government is entirely right to think about how to tackle this issue but I’m yet to be convinced that “pot follows member” is the right solution.

“Steve Webb has done many of the right things; but I believe he is wrong on this one.”

Mr Waterson stated that with the average worker changing jobs so frequently, the frictional costs will be substantial and there is no guarantee pots will not be transferred into poorly run and poor value schemes.

In 2012, when the Department for Work and Pensions consulted on the options for small pots, Mr Waterson backed the aggregator model. He suggested that they would be subject to rigorous standards and potentially managed by providers like Now: Pensions.

“Whatever route is ultimately adopted, the costs to the industry both in terms of time and money are going to be significant which is why it’s critical all transfer mechanics are thoroughly considered and assessed. A rushed solution could prove an extremely costly mistake which would prove even more costly to undo.”

Mr Waterson also commented on the lack of barriers to entry in the master trust market, which has led to a rumoured 70 operators currently providing various solutions.

“The proliferation of master trusts is worrying the regulator but I doubt that the ICAEW’s mastertrust assurance framework will do much to drive consolidation,” he said.

“Anyone can call themselves a ‘mastertrust’ at present, but we believe independent and transparent governance is fundamental to the concept of a master trust.

“Success in the auto-enrolment market is predicated on scale and, over time, smaller schemes simply won’t be able to achieve sustainability. With a barrage of new requirements and regulations, the costs of running a master trust are also rising. For many, competing in this market won’t be sustainable.

“It’s imperative that the government and regulators have a well thought through plan to manage this consolidation; done without proper thought there is real potential for member detriment.”