Providers, advisers and industry bodies have today (6 October) called for political consensus on pensions policy, as the last of the party conferences brought yet more proposals to change the tax system.
At the Liberal Democrat conference this weekend it was announced that the party would seek to pump an extra £1bn of real-term funding into the National Health Service via tightening the cap on pension tax relief, among other things.
Pensions minister Steve Webb stated: “We could probably spend less on pension tax relief overall – helping to contribute to deficit reduction – but also rebalance the money so that everyone, rich or poor, got help at the same rate.
“We need to work through the details, but in my view the next government will need to address this long-standing unfairness.”
The Association of British Insurers’ deputy director general Huw Evans called the proposed reduction in the lifetime allowance a “disappointing example of short term tinkering.”
Mr Evans added the “policy priority needs to go hand in hand with a long-term settlement on the taxation of pensions savings”.
He said: “The best way to achieve meaningful pension reform is through cross-party consensus behind a wider strategy that can deliver stability in the pensions system over at least two parliaments – only then can we build lasting change in saving rates.”
Mr Webb also warned that he would “watch the industry like a hawk” as it came up with new products and options in response to next April’s at-retirement freedoms, “to make sure we do not have a repeat of some of the past horror stories”.
His comments come after last week’s news was dominated by the chancellor’s surprise move to abolish the 55 per cent ‘death tax’ on pension funds, announced at his own Conservative Party’s conference in Birmingham last week.
It also follows Labour leader Ed Miliband’s plan to fund the NHS by levying an annual tax on owners of properties worth more than £2m; something criticised for potentially having a detrimental effect on pensioners.
On the Andrew Marr Show yesterday (6 October), Lib Dem leader Nick Clegg discussed potential negotiations in the event of a hung parliament and specifically suggested it might push for concessions on taxes on the wealthy in any future coalition agreement with the Conservatives.
This might include beyond tax relief changes proposals for its own version of a ‘mansion tax’.
Roy Durrant, chartered financial planner at Norwich-based Almary Green Investments, said that the constant threat of changes to tax relief and the lifetime allowance charge creates uncertainty, which in turn reduces confidence in the system and is likely to reduce pension savings.
“The reduction in the lifetime allowance also makes giving advice to individuals difficult when they are penalised when they are prudent and their pension performs well.
“Who would be responsible if a 20 year old was automatically enrolled into a workplace pension and they exceeded this limit in 48 years time; £1m would be the equivalent to c.£305,000 assuming 2.5 per cent inflation.”
Malcolm Coury, founder of Bath-based Money Wise IFA, told FTAdviser that Mr Webb is forgetting pension tax relief is not a relief in the normal sense but a tax deferral, because the pension is subject to income tax at marginal rates when it is drawn.
“Further, only the basic rate relief is actually claimed by the pension provider whether the pension contributions are paid by a higher or basic rate tax payer. The higher rate tax payer then has to claim the higher rate tax separately.”
He explained that to be consistent, a reduction in higher rate tax relief on contributions would have to be accompanied by a reduction in higher rate income tax when the pension is eventually drawn.
“The Liberal Democrats really need to decide whether they want to use the tax system to encourage people to make provision for retirement or not.”
Adrian Murphy, partner at Glasgow-based Murphy Wealth, said while pensions can be a vote winner and the changes certainly keep IFAs busy, “there has to be some consensus or cross-party agreement, because pensions are just being used as a political football at the moment.”
Martin Tilley, director of technical services at self-invested pension provider Dentons, told FTAdviser that while he understands the party political need to differentiate themselves, “constant changes on an annual basis is counterproductive to the goal of encouraging people to save”.
“[Every initiative] requires the providers to understand the new changes, amend their IT systems to accommodate it, rewrite and reprint any marketing literature etc. IFA’s need to undergo research and education so as to be able to explain it all to their clients and all of this has a cost… to the end consumer.”
Andy James, head of retirement planning at Towry Wealth Management, said that policies introduced during this parliament, like the simplified flat-rate state pension and the introduction of auto-enrolment, still need time to bed in.
“Ultimately, however, the government is only going to do so much to help. Savers should seek sound financial advice to help make the decisions about how they will fund the retirement they want – particularly as the basic UK state pension remains among the lowest in western Europe.”
peter.walker@ft.com
