Advisers should pull politicians’ strings in pension revamp

So the pension industry in all its guises has been presented a very challenging green paper which suggests, among other things, potentially getting rid of pension tax relief.

It doesn’t need a genius to say that this is quite a pressing issue for most investment advisers, advisers to company schemes and to pension firms and fund managers.

We could move from what has loosely been an ‘exempt, exempt, taxed’ system - which sees retirees taxed when they recieve their pension - to a ‘taxed, exempt, exempt’ system, whereby contributions are taxed upfront.

However, that last ‘exempt’ requires putting rather a lot of trust in a distant future government to play ball.

This has been described by the chancellor himself as potentially making the tax treatment of pensions more like that for Isas, though the green paper also discusses matching of contributions from a combination of employers and the government.

Now various pension firms and the Association of British Insurers have been putting out carefully-worded statements about the review. The latter organisation actually warmly welcomed it.

Such is the world of careful lobbying.

I feel advisers should think very carefully about answering this consultation

This columnist suggests the investment advisers and workplace scheme advisers throw caution to the wind and suggest that completely removing tax incentives around pensions could do a great deal of damage to savings, investment and of course, one of the Government’s greatest successes to date, auto-enrolment.

This argument is tricky, however. It is quite clear that many big pension organisations are now resigned to a fundamental shake-up of these reliefs and that the higher rate of relief simply does not look sustainable given the state of the political arguments.

Advisers may find themselves looking back fondly on former pension minister Steve Webb’s proposal to move relief to around 33 per cent for everyone and then keep it there.

Investment advisers also know that we are in danger of breaking employers’ attachment to their own pensions, particularly if this matching comes in significantly lower than it is now.

Some argue that for the £150,000 earners and - realistically for those on £110,000 given the £150,000 figure includes pension contributions - this is already happening.

It is also worth considering whether the stated goal of using the money more efficiently to better encourage pension savings will survive intact when that money is detached from what someone’s taxable income is.

In other words, while this will, in theory, free up a pot of revenue, there may be a temptation to raid it or at least be less generous.

A few final points – advisers will probably not win any argument that is solely based on the interests of their client base. They will have to look at the interests of all pension savers.

Advisers might argue the very fact pensions and Isas are treated in different ways is a strength not a weakness. The big reputation hit to pensions came from the fact the government had been telling people what they had to do with their money, not from any issues specifically to do with accumulation.

Finally, if we are to have wholesale change, it would be much better if all politicians could be brought on board rather than having pensions viewed as a pot of money not just for pension investors but for cash strapped governments too.

Yet I do feel advisers should think very carefully about answering this consultation. Don’t leave it solely to those ‘warmly welcoming’ insurers.