As I sit here writing this column, it is difficult to comprehend what changes we might see affecting the pension sector in the next few months and indeed years. We have a snap general election in the UK, France has a new president with little requisite experience, and concerns abound over the manoeuvrings of the US, China and Russia on the world stage. Despite this, advisers and UK consumers have to plug away and keep focused on the long term.
Recently, the focus has been on contributions of various sorts. Last month, I wrote about the complexities of the tapered annual allowance and the ongoing struggle to try and determine precisely what someone can contribute.
This month, we continue to battle with that, but we also have the money purchase annual allowance (MPAA) reduction up in the air again, as well as the ongoing saga of in-specie pension contributions thrown in with the general election chaos.
MPAA uncertainty
It was a surprise to all of us in the industry when the reduction in the MPAA was pulled from the Finance Bill 2017. This was after a consultation – to which industry experts had responded advising it was a bad idea – concluded that it should still go ahead. In fact, the change was effectively already in force, given the start date of the reduction was 6 April 2017.
We do understand that the change will be in the next Finance Bill following the election, but there is still no guarantee of this.
This causes a real issue for advisers who are trying to help clients plan their pension contributions for the year. You would like to think that the reduction wouldn’t come into force until at least the day the new legislation is published or, even better, the beginning of the next tax year.
However, we can’t be certain of this either so many, if not all advisers, are working on the basis that the allowance is £4,000 for the tax year 2017/18. Should this not be the case then additional contributions can be made at a later date to top up to the full £10,000.
There haven’t been any definitive statements on what will or won’t happen, which I imagine is because you can’t be sure who will be making these decisions after the 8 June, and when or if they will get around to producing the legislation. This is really no way to plan. It is akin to the issues with the tapered annual allowance, where no one knows what their annual allowance actually is at this point as it is impossible to make an accurate calculation until the end of the tax year.
Not exactly helpful, but maybe this is the point. By making the calculation and methodology of tax relief so complicate, if a flat rate of tax relief were ever introduced, it would seem simple by comparison.
In-specie contributions
Over the last year, we have seen HM Revenue & Customs not just crack down on the use of in-specie pension contributions or, more accurately, pension contributions satisfied with an asset instead of the promised cash, but practically wipe out their use entirely.
There seems to be little sense in this for cases where easily valued assets such as listed shares or independently valued properties are used, but they appear to have been caught all the same.
The exact issue in HMRC’s eyes varies depending on who you talk to. In some cases it appears to be the process, whereas in others it appears to be the assets used. However, in all cases it is the client that is going to suffer.
The scheme may ultimately be held responsible for something that was done in good faith, but it is the end client that is left in limbo, yet again, by a retrospective stance taken by HMRC on something that was, until recently, common practice.
Election fever
General election time prompts all sorts of promises and wild ideas to pop out of politicians’ mouths, which we then have to deal with and decipher. We have already heard detailed pension manifestos from those who aren’t actually politicians in the hope that they are listened to.
Most of this is posturing to get media coverage, so I won’t name anyone here, regardless of how angry they might make me. Many of the same ideas raise their heads time after time, such as the scrapping of pension tax relief in favour of a bonus system, reducing the annual allowance and doing away with the lifetime allowance.
Some of these ideas would be welcome, but many haven’t been considered in their entirety, for example their impact on defined benefit schemes and auto enrolment.
The biggest issue that is usually ignored is the cost of these changes. These costs won’t just impact HMRC, but also providers and, at the end of the day, the consumer, too.
Taking pension tax relief as an example, the implications of changing to a flat rate of tax relief would be immense and I have talked about them in depth before. This sort of change wouldn’t just impact personal contributions and the tax relief reclaimed by individuals, but also payroll systems, employer contributions and therefore employment contracts.
That is without even considering the impact it would have on a defined benefit pension scheme that may already be struggling, which is where a significant amount of relief goes.
I would however welcome some more simplicity, ideally going back to a single annual allowance and a sensible lifetime allowance, as scrapping it all together is really just a pipe dream.
These changes would be much simpler and easier to administer, and, more importantly, easier for clients to understand in the long run.
Commencement lump sums
With an election looming we yet again have the conversation about whether or not we will still have access to the tax-free portion of pension savings in the future.
Although every Budget and every election brings new fears on this front, this has increased over recent years, first with the change of name from tax-free cash to pension commencement lump sum (PCLS), and, second, with the consultations about changes in tax relief for high earners.
Up until recently, there have been very few, if any, changes that have been applied retrospectively, leading to layers of protection, but with few actually losing out on what they had expected.
I hope that if we do ever see the loss of PCLS we will have some sort of protection for the amounts already expected and planned for.
Political football
The current environment is one of the most difficult in memory when it comes to advising on long-term savings plans, especially as we aren’t even sure what the short term savings prospects are.
Pensions shouldn’t be used as a political football, or, even worse, a pot to dip into when other tax revenues don’t pan out as expected. However, this is what we are expecting to happen, not least because pledges regarding other spending are likely to increase.
The only thing we can do is wait it out and see who is in charge after 8 June, which at least is not too long in the grand scheme of things. However, the uncertainty only means that those who are unsure if they should save or not will be put off even more, creating a bigger issue for the UK government and the client in the future.
Claire Trott is head of pensions strategy at Technical Connection
