Experts warn of major pension tax changes this fall – DB & Derisking

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Speaking at the Pensions and Lifetime Savings Association annual conference, Laura Myers, PLSA board member and LCP Defined Contribution Officer, explained that none of the most frequently cited options for the pension tax relief does not meet the five criteria defined by the sector body.

Any reform must promote adequacy, encourage good behavior, be fair, simple to adopt and administer, and be sustainable and sustainable. The current system meets three of the five criteria, but none of the possible alternatives meets more than two, she noted.

Switching to a single rate of 25% or 30%, for example, would promote adequacy and encourage good behavior, but would not be easy to adopt and administer.

I think there’s a lot of discussion that we need to have to think about what we’re really trying to achieve by taking £ 5bn out of the system and even before that what do we think the whole thing is? the pension the system is actually trying to achieve on its own

Chris Curry, IPP

The reduction in the lifetime allowance and the annual allowance would be simple to adopt and administer and would be long-lasting and lasting, but would not meet any other criteria. The same goes for the abolition of the national insurance relief on employers’ contributions.

The other options, such as the splitting of defined benefit and defined contribution plans, a flat rate of 20% or capping the non-taxable lump sum at £ 75,000, meet only one of the objectives or, in the case of tax-exempt treatment – do not meet any.

“It’s difficult because, frankly, you wouldn’t start from here. You end up looking at the least worse situation when it comes to radical reform, ”Myers said.

“And then when you explore the real numbers on the potential benefits for certain groups, the amount the government could generate, those numbers are really moot.”

In the case of a fixed rate of 25 percent, for example, the government would generate only £ 0.6 billion of the £ 5 billion it would seek to raise, and that is before the tax break is decoupled from income tax, she explained.

“Overall, therefore, it is the existing system that we are supporting that best meets our criteria. We know it’s not perfect, but it’s really what causes the least harm, ”she said.

Pension taxation may be too generous

Carl Emmerson, deputy director of the Institute for Fiscal Studies, argued that there are areas where the current pension tax regime is too generous and where the government could seek more money.

“There is a lot to welcome the system which is built around the idea that what you put into a pension is tax free at that point. When income accumulates on a pension, no tax is taken on that income – and when you take money out of a pension, it is taxed. This kind of system would have many advantages, ”he said.

“It would allow people to smooth their incomes throughout their lives, which would mean that our tax system would not be unduly harsh on people who have had high incomes at certain periods of their lives.

“It would actually tax more heavily those who end up getting higher returns, so if you get a really good return on your pension through the law through skill, through a lot of effort, the state would impose on you. end when you get a higher income. retirement income, ”Emmerson continued.

He argued that there are three areas where the current regime is too generous and where changes could be made. The 25 percent tax-exempt lump sum, for example, is not “so well targeted”, and capping it “would make more sense than putting a tap on the total amount of pension fund you can accumulate. , and it would make a lot more sense than setting an annual limit on the amount you can put into a pension ”.

Exempting employers’ contributions from national insurance is also “extremely generous” and benefits from unintentional subsidies from increased national insurance rates and reduced income tax, he said. .

“We have seen that the announcement of the new health and social levy will continue this trend. If your employer puts money into a pension on your behalf, they will escape this levy along the way, and that levy is not paid out of pension income at retirement, ”Emmerson explained.

“So I think there are good reasons for some national insurance contributions to be taken either from employers’ pension contributions or from retirement income received, and there is a lot of income at stake here. “

He added that the last area where the current regime is too generous is that of pension funds being bequeathed, which is “untenably generous” and turns pension funds into legacy vehicles, not retirement savings.

No change planned in the budget

Chris Curry, director of the Pensions Policy Institute, questioned whether it was even desirable to try to squeeze £ 5 billion from the pension system.

He said, “There are always decisions to be made. There are always pros and cons to some options. There are always winners, and there are always losers. But in my opinion if you try to take £ 5 billion out of the system it’s very difficult to create winners in that particular sense and all you are going to do is create losers.

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“So I think there is a lot of discussion that we need to have to think about what we are really trying to achieve by taking £ 5bn out of the system, and even before that what do we think is the whole retirement system is actually trying to achieve by itself.

The government’s temporary suspension of the triple lockdown has reopened questions about the long-term sustainability of the system, and the suspension itself – or something like that – could prove to be a long-term solution, he said. he adds.

Myers suggested that, especially in light of recent measures like the social care tax, “we’re probably a little less likely to see another sweeping government announcement on the tax. Maybe pensions will not be the place where we are going to see a huge radical reform ”.


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