Industry warns against Treasury ‘tax raid’

First reported in The Telegraph, Treasury officials are supposedly drawing up a list of potential reforms to the way in which pension contributions are taxed, with the aim being to raise money to pay for the heightened public spending during the Covid-19 pandemic.

The Telegraph quoted “well-placed Whitehall sources”, whom it said have concocted three different reform proposals, the first being a reduction in the lifetime allowance from just more than £1m to £800,000 or £900,000.

This proposal from the Treasury simply sends the wrong signal to savers trying to do the right thing at a time when we should be encouraging people to save for retirement, rather than threatening to penalise them with an arbitrary tax charge

Andrew Tully, Canada Life

A flat rate tax proposal has also been made, according to the report. Pensions Expert has reported previously on calls from former chancellor Sajid Javid and the Centre for Policy Studies that such a rate be introduced. 

Currently, higher earners get a tax relief rate of 40 per cent, while lower earners get 20 per cent. The suggestion is that this be changed to around 30 per cent for both. It is thought this would simplify the tax system, lower the cost of administering all of its many top-ups, and see only higher-rate taxpayers lose out.

The third proposal is for a new tax on employer contributions.

The government has, meanwhile, moved to dismiss suggestions that the triple lock will be targeted, despite warnings that the end of lockdown will see average earnings increase dramatically, increasing the cost of the triple lock.

Industry unhappy

The industry has not welcomed the rumours.

Nigel Green, founder and chief executive of deVere Group, warned that a change in the lifetime allowance would be “a stinging, stealthy raid on pension savings”.

“It would be a slap in the face for those who have worked hard and saved hard, prudently putting money aside in order to be able to enjoy their retirement with loved ones,” he said.

He also warned that the move would affect many more people than might be assumed.

“It’s not just those who already have a pension over £1m. Others need to look ahead and assess if future contributions and investment growth could drag them into a position in which they’ll be above the threshold,” Green explained.

Andrew Tully, technical director at Canada Life, said the reforms were not what the country needs. 

“This proposal from the Treasury simply sends the wrong signal to savers trying to do the right thing at a time when we should be encouraging people to save for retirement, rather than threatening to penalise them with an arbitrary tax charge,” he said. 

“We already have annual limits on the amount you can save via a pension wrapper and there is a significant disparity between how defined contribution savers and those with defined benefit income are treated for lifetime allowance purposes,” he continued.

“The last 10 years has seen the lifetime allowance fall from £1.8m to £1m, stay frozen at £1m, gradually increase by inflation, and now is frozen again. These continuous changes to pensions policy exacerbate the uncertainty many people feel around pension saving.

“Instead of constant tweaks we need stability to give people confidence to save for the long term.”

Isio partner Mike Smedley echoed this point. “The worst of all worlds would be cynical tinkering to raise tax without fixing any of the problems,” he said.

“The mooted cut in lifetime allowance is a good example – it has been up and down like a yo-yo since it was introduced, with savers left gambling on a future chancellor’s mood at the point they retire.”

Everyone else also unhappy

The government has also been warned that the reforms could irk normal people as well as pensions specialists.

Tom Selby, senior analyst at AJ Bell, said that all three reforms “would be hugely risky, hitting directly at heartland Conservative voters and undermining the foundations being laid by automatic enrolment”.

He explained: “Introducing a flat-rate of pension tax relief, an idea often touted by think tanks, would present genuine practical challenges and would likely result in tax rises for public sector workers in DB schemes, including many of the NHS staff who have been rightly praised as heroes during the pandemic.

“The lifetime allowance has already been cut to the bare bones, while employers would likely be furious if the government increased their pension costs just as many attempt to recover from a nightmare year.”

Selby continued: “More fundamentally, while dealing with the pandemic is the biggest short-term crisis facing the UK, inadequate retirement saving remains one of the most significant long-term challenges.

“Any further reforms – and in particular cuts in pension tax relief – need to be mindful of the impact on savings incentives over decades.”

Becky O’Connor, head of pensions and savings at Interactive Investor, a flat-fee pension platform, warned that the reforms to tax relief and employer contributions target “two benefits that make pensions the best way for most of us to put money aside for the future”. 

“If the government chops away at them, workers face poorer outcomes in retirement. This could translate into more pressure on public services from a less financially secure older population in years to come,” she said.

She added that the government should “think hard before yanking away some of the few tools people have to look after themselves in old age”, explaining that though more people today have workplace savings thanks to auto-enrolment, workers are “generally in far less generous pension schemes than those of previous generations” because of the shift from DB to DC models.

“People are also more switched on to their pensions these days,” O’Connor continued. 

“So while pension tax changes might be seen as a clever policy move that wouldn’t attract too much negative attention in former times, now, with workers paying more attention to their retirement pots, any tinkering could be more unpopular than expected.”

Coupled with retaining the triple lock, which is likely to grant state pensioners a “windfall increase” next year, the reforms represent “an intergenerational double-whammy”, Aegon’s pensions director, Steven Cameron, warned.

“Once again the prospect of reforming pension tax relief for higher earners is being floated as a means to restore holes in the government’s finances. What’s different this time is that the state pension triple lock is also firmly in the spotlight with recent earnings anomalies likely to grant current state pensioners a bumper increase next April,” he said.

“Reducing the savings incentive for many higher earners, while hiking the state pension could end up stoking intergenerational tensions and does raise questions about fairness.”

Asked to deny speculation that pensions are due to be hit with punitive tax changes to pay for the government’s Covid-19 response, a Treasury spokesperson told Pensions Expert: “We do not comment on speculation about tax changes.”