Two pensions policy experts from consultancy Towers Watson have suggested that the most likely outcome of the government’s green paper into pension taxation will be moving to an Isa-style regime.
Last month’s summer Budget announced the potential for further radical reforms, with the chancellor stating that pensions could be treated like Isas. “You pay in from taxed income – and its tax free when you take it out – in-between it receives a top-up from the government,” he explained.
As the paper explained, options ranged from a fundamental reform of the system - for example moving to a system which is ‘taxed-exempt-exempt’ like Isas and providing a government top-up on pension contributions - to less radical changes - such as retaining the current system and altering the lifetime and annual allowances - as well as options in between - like a system of flat-rate tax relief.
Towers Watson’s senior consultants and pensions policy specialists David Robbins and Dave Roberts both said that the ‘P-Isa’ option was most likely, if George Osborne wants to continue with the ‘radical reforms’ initiated under the coalition.
This political will for meaningful change means maintaining the existing system is unlikely, especially given the government’s drive to reduce the deficit - alluded to in the Budget statement that “it is also vital that the system is sustainable”.
Mr Robbins pointed out that in the Treasury, ‘sustainable’ is a synonym for ‘cheaper’.
The flat-rate option - pushed by previous pensions minister Steve Webb - was deemed least likely, as it brings many of the same problems that would have to be overcome with the P-Isa reforms, but adds complication to the current regime.
So while treating pensions like Isa with a government top-up would artificially flatter borrowing numbers - a potential political temptation - Mr Robbins explained that there are still many hurdles that would need to be overcome.
He questioned how the ‘new pensions’ be segregated from ‘old pensions’ so only savings that enjoyed tax relief on the way in are taxed on the way out - basically would savers be invited or forced to pay a one-off levy so that existing savings could be withdrawn tax free?
Employees would also incur a tax charge when an employer contributes to their pension, which raises questions over whether this would be siphoned off the contribution or come out of pay, along with the point of whether only income tax be applied, or national insurance contributions as well.
Finally, and according to Mr Roberts most importantly, the consultation paper asks whether there should be separate tax regimes for defined benefit and defined contribution pensions, with potential outcry over fairness in maintaining a more favourable regime for DB, or permitting higher aggregate savings where individuals have access to both.
Mr Robbins commented that retirement planning may be easier if the government had no further claim on money inside a pension pot, but whether or not anyone would trust the state to run a surplus now because it is collecting tomorrow’s taxes today, remains to be seen.
Several industry experts commented that despite the open-ended consultation, their feeling was that the outcome was already pre-determined.
peter.walker@ft.com
