Talking Head: A move to tax pensions like Isas is on the cards with far-reaching consequences for long-term saving, says the Society of Pension Professionals' Duncan Buchanan.
Chancellor George Osborne appears to be attracted to moving pension savings to a taxed, exempt, exempt – or TEE – style of taxation, similar to Isas.
Such a move would have a major impact on the pension saving culture of the UK, at a time when auto-enrolment is still in its infancy. The risk of unintended consequences is high.
One consequence is that take-home pay will be immediately reduced.
The Society of Pension Professionals’ calculations show that an earner on £24,000 could be more than £500 a year worse off if taxed on their and their employer's pension contributions.
How long would a younger generation accept pensioners paying no tax while being an increasing burden on the health and welfare system?
In turn, workers and employers may well reduce contributions to maintain take-home pay – resulting in lower levels of retirement savings and less investment in UK plc.
The position is even worse for public sector workers and others in final salary schemes; a 10 per cent rise for a person mid-career on £60,000 would result in an £18,000 reduction in take-home pay in year one.
Any suggestion that defined benefit schemes should be taxed separately from defined contribution schemes should be rejected, as the lines between DB and DC are blurred and can be easily arbitraged.
Margin of error
Another consequence is that the reduction in tax relief may not be as high as anticipated.
HM Treasury’s figures rely on data published by HM Revenue & Customs, which it admits are subject to a "particularly wide margin of error".
The tax relief figures also include deficit repair contributions to DB pension schemes.
Currently employers pay nearly £50bn a year towards making-good DB funding deficits on existing pension promises, and it is difficult to see how individuals could be taxed on these contributions.
Many in the pensions industry suspect the government's motive is to reduce the level of tax relief provided on pensions.
If so, then there are a number of ways to adjust the existing system to deliver the same result without the risk of unintended consequences.
If there were a choice between a TEE system and restricting the tax-free lump sum to £100,000, most would vote for the latter.
Likewise, it may be time to increase the 20:1 lifetime allowance factor, particularly for those taking their DB pensions before age 65.
This consultation is taking place at speed and without reliable data or a clear explanation of the objective.
Given the long-term nature of pension savings, the £3tn of existing pension savings and their importance to the economy, we should be calling for an in-depth review by a pension commission to build cross-party support for any changes to the existing system.
However, how long would a younger generation accept pensioners paying no tax while being an increasing burden on the health and welfare system?
What starts as TEE, or perhaps more accurately TtE (to reflect the loss of dividend tax relief), could well become TtT.
Duncan Buchanan is president of the SPP and partner at Hogan Lovells International
