The chancellor George Osborne has now decided that any major changes to the current system of tax relief on pension contributions will be made in the 2016 Budget, rather than in this year’s Autumn Statement, as originally planned.
Is more radical change indicated by the postponement of the announcement?
That is unclear, but the fact the government is taking the time to give the issue detailed consideration is to be welcomed (albeit with some caution).
The consultation, which closed on 30 September, raised several wide-ranging questions, and the implications of some potential material changes are examined below.
Does the current system’s complexity undermine the incentive for individuals to make pension savings?
The government’s view is that pension saving should be simple and transparent and that one of the problems with the existing structure is its complexity.
While simplicity is a laudable aim, the current complexity has in large part been created by successive governments making almost annual changes over the past two decades, the last Budget in which some aspect of pensions tax relief was not changed being in 2007.
It is unlikely that pensions can be simplified while successive governments are unable to resist implementing multiple changes to erode tax relief.
This underlying problem is illustrated by the almost annual changes to which the “A-Day pensions simplifications” of 2006 have been subjected.
The impact of further reductions in 2016 to the annual and lifetime allowances emphasises the government’s inability to avoid seeing pension tax relief as a readily available source of income to the Treasury.
The majority of pension savers understand that contributions are made tax free and that pensions income is taxable at their marginal rate in retirement.
This is beneficial to all savers as, under the exempt-exempt-taxed (EET) regime, the investment of the additional untaxed portion of the contribution enjoys compound growth over the saver’s working life.
Repeated interference with pension tax relief by successive administrations undermines savers’ confidence in the stability of the system and should be resisted.
What about moving to a TEE structure?
Moving to a taxed-exempt-exempt (TEE) system would be a leap into the unknown and the figures used in the consultation are acknowledged to contain a significant margin of error.
There is also no regard paid to the impact on tax collection for future governments.
Adopting TEE would add complexity and cost in segregating existing pension savings made under the EET regime from future savings out of taxed income.
It is likely that individuals would be confused by their savings being taxed under the “old” and “new” regimes, and how best to access their savings in the most tax efficient way.
Such a fundamental change could create huge difficulties for employers in terms of changes to both payroll and pension administration systems. Member communications would also be challenging.
No changes should be made which would result in employers losing faith and reducing contributions made for their employees. It is unclear how a move to TEE might impact on the tax deductibility of employer contributions, and whether these could then be taxable as a benefit in kind.