The pensions industry has called on the Chancellor to stay away from radical reforms in next week's Budget and instead tweak existing rules to help individuals save more.
Chancellor Rishi Sunak is expected to make a number of announcements in his Budget speech, to be delivered on Wednesday (October 27), but has been advised to tread carefully when it comes to making changes to pensions.
The industry has warned the Autumn Budget was “not the time” to tinker with big ticket items such as tax relief and the Chancellor should instead make targeted interventions on issues such as the net pay anomaly and minimum pension age.
The 'don't': Pension tax relief
Tax relief is a big concern for the industry with fears that any big changes could cause major disruption.
Currently tax relief on pension contributions is paid at the saver's marginal rate of income tax at the point of saving. Pension income is then taxed at point of withdrawal, opposite to the Isa system.
The threat of changes to pensions tax relief, such as a switch to Isa-style pensions or a flat rate for all or even a cut to high earners' relief, has been on the cards for a while but tends to resurface when Budget day nears.
Previously there have been concerns that the government was looking to cut high earner’s relief to 20 per cent or move to a 25 per cent flat rate.
Steven Cameron, pensions director at Aegon, said: “[Moving to flat rate relief] would be particularly challenging for defined benefit schemes and could mean medium to high earners including doctors in public sector schemes face big tax bills.
“It would only benefit the Exchequer if the cuts in incentives for higher rate taxpayers were greater in total than any increased incentive for basic rate taxpayers.
“There are no quick wins here for the Chancellor, change would be very complex and any savings for the Exchequer from less tax relief would take significant time to realise.”
Tom Selby, head of retirement policy at AJ Bell, also said any move to restrict tax-free cash would prove hugely unpopular.
He said there would also need to be a protection regime put in place so pension contributions already made continue to benefit from their existing tax-free cash entitlement.
Selby said: “This would deliver an unwelcome double for the Chancellor of unpopularity and complexity. What’s more, any savings to the Exchequer would potentially take years to materialise.”
The 'do's':
1 Net pay issue
The net pay anomaly occurs in the pensions tax relief system and means low earners are missing out on a 20 per cent boost on their pension contributions if their scheme operates a net pay arrangement, which is the case with the majority of pension funds in the market.
The Conservative Party had included the issue in its election manifesto in 2019 but so far has failed to address it with analysis from Quilter finding low earners have lost £181m in pension funds since then.
Now the industry appears optimistic that the Autumn Budget could see this issue addressed, saying the government has let this drag on for too long.
Ian Browne, retirement expert at Quilter, said: “It may not be the most glamorous of issues, but if the Chancellor is truly committed to helping working people and truly committed to ‘levelling-up’, then he must start by ending the two-tier pension system that leaves many lower-earners worse off.
“The need to come up with a solution takes on renewed importance now Uber drivers are to be enrolled into a pension scheme for the first time, but due to the nature of their work may earn below the personal allowance.
“The government must stop dithering and end the net pay delay.”
2 Pension age rise
Concerns have also been raised previously that the government's planned hike to the normal minimum pension age will further complicate the pension system and should be paused.
The government announced in 2014 that the NMPA would increase to age 57 in April 2028 to reflect long-term increases in longevity and changing expectations of how long people will remain in work and in retirement.
But not all pensions will be caught up in the rules as some might offer their members the right to take their benefits at an earlier age.
For instance, the government said in July that due to their special circumstances, members of the police, firefighters and the armed services would automatically have protected pension ages even if their scheme rules did not state this.
The Budget and accompanying Finance Bill present the “perfect opportunity” for the Treasury to drop or amend how it will implement the NMPA changes, Cameron said.
He added: “The Treasury has been seeking to ‘protect’ a small minority of individuals who are in schemes whose rules by sheer accident of history give an ‘unqualified right’ to take benefits at age 55. While well meaning, these protections would create horrendous complexity and multiple unintended consequences for little real benefit.
“The pensions industry is united in calling for a radical rethink to keep things simpler and fairer across the board, while helping pension savers understand their entitlements so they can plan for their future.”
See also: ABI warns MPs over minimum pension age hike
3 Auto enrolment reform
The government has previously said it wants to reduce the earnings limit for auto enrolment eligibility from the current £10,000 per year and cut the age of eligibility from the age of 21, but it has not yet actioned the reforms.
The Investing and Saving Alliance (TISA) has called on the government to put these agreed outcomes into legislation so that young people can start saving earlier and to ensure low earners are not disproportionately impacted by the lower earnings band.
Meanwhile, Aegon has said more needs to be done to help the self-employed.
Cameron said: “While auto-enrolment has successfully boosted the retirement savings of millions of employees, the self-employed are not included and with every year that goes by, they are falling further behind their employed counterparts.
“With auto-enrolment reaching its tenth anniversary next year, finding solutions to encourage default retirement savings for the self-employed would be a huge step towards ‘levelling up’ pensions for this vital and growing part of the workforce.”
amy.austin@ft.com
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