TaxAug 7 2019

Govt urged to stop pensions policy ‘whack-a-mole’

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Govt urged to stop pensions policy ‘whack-a-mole’

The government is being urged to rethink the whole pension tax system instead of just scrapping the tapered annual allowance and replacing it with something else.

It was announced today (August 7) that HM Treasury will be reviewing the impact of the tapered annual allowance on public sector pensions, after doctors have been campaigning to scrap it for months.

But Tom McPhail, head of policy at Hargreaves Lansdown, told FTAdviser the government should start from scratch instead.

He said: “The government needs to step away from this whack-a-mole approach of police making.

“There is a whole list of ways in which the pension system doesn’t work. They need to start from scratch, ask themselves how the pension system and its tax architecture could serve the needs of individuals, employers and wider society.

“Then decide how much public money they can use to incentivise saving and the best way to deliver it. If you did that you’d end up with something looking very different from the system we’re battling with today.”

Rachel Vahey, independent pension consultant, said she was not convinced the Treasury will be looking to reform the tapered annual allowance for all.

The Treasury said this morning it was looking at the issue in public sector pensions without disclosing whether wider reform was on the cards. 

She said: “This is the thin end of the wedge. It would be sensible to look at the whole private and public spectrum.”

However, if the government decides to have an overarching approach, Ms Vahey said she would like to see a “bigger review and whether the annual allowances are needed, or maybe if we should be treating DB an DC in separate formats for tax purposes”.

Simon Harrington, senior policy adviser at the Personal Investment Management & Financial Advice Association, noted the “current system is ripe for total review – it cannot be the case that the government seeks to address the legion of issues present in it on a case by case basis”.

He added: “We support a review of the taper but would question why this could not be done on a broader basis.

“The vast majority of different demographic groups in this country are not saving enough – if the government truly considers tax relief to be an incentive for them to save then it must stop penalising those that do and encourage those who are not saving enough to save more.”

Bob Scott, senior partner at consultant LCP, said that the whole pensions tax system “is a mess, the ideal would be to sit down with a blank piece of paper and redesign the whole thing”.

However, he added it was “really difficult to have a progressive tax model where higher paid have less scope to benefit from tax relief”.

It emerged in December that the number of members leaving the NHS Pension Scheme was five times higher than that seen by other public pension funds, most likely because of the taper.

Introduced in 2016, the tapered annual allowance gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.

The taper means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.

Ian Browne, pensions expert at Quilter, said it was clear the tapered annual allowance was not fit for use, and was failing in its intended purpose.

He noted that the government’s proposal of allowing doctors to set their level of pension accruals themselves at the start of each year, as also proposed this morning, was a quick fix which “shows how the Treasury keeps tinkering with the pension tax system, but ultimately gets itself tied in knots”.

He said: “However, these fixes only come if they’ve got public weight behind them and it is clearly a political play.

“If only they could act so swiftly on other issues such as net pay and self-employed retirement saving, but these are easier to sweep under the carpet.”

Some other experts, however, have proposed solutions for this issue.

Sir Steve Webb, former pensions minister and director of policy at Royal London, stressed that the best solution would be outright abolition of the taper, “even if this meant a slightly lower annual allowance across the board”.

Martin Tilley, pension director at Hurley Partners, would like the government to go back to the earnings cap solution that was in place before the annual allowance was introduced.

This limit, which would be circa £160,000 nowadays if it hadn’t been scrapped, set a ceiling on the amount of benefits that could have been paid by defined benefit occupational pension schemes.

Mr Tilley said: “Although I work in executive and high net worth individuals’ pensions, I think an earning cap of £160,000 is plenty.

"With 40 years’ service, the potential exists for a pension of well over £100,000 per year which is quite frankly plenty for anyone. In fact, it might even be reintroduced at lower level.  

“Anyone earning over the earnings cap can make additional provision outside of the tax privileged pension framework.

“Doctors, for example, can earn whatever they like doing extra shifts and overtime, but it simply wouldn’t be pensionable and the whole excess annual allowance issue goes away.”

maria.espadinha@ft.com

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