Pensions under the cosh again: anything new? Ian Neale looks at the next round of budget changes for pensions.
Well, amid the welter of eye-catching announcements yesterday there was one ray of light. I'll come onto that later.
First I want to say something about the impact of the Chancellor's confirmation that as we were warned in the Conservative Party's pre-election manifesto, the Annual Allowance (AA) will taper down for high earners.
For every GBP 2 of "adjusted income" over GBP 150,000, an individual's AA will be reduced by GBP 1, from GBP 40,000 down to a minimum of GBP 10,000. Aside from the additional advisory costs and unavoidable AA charge some individuals will face, scheme sponsors will face extra monitoring, communication, administration and system costs.
All round, a significant disincentive for corporate pension sponsors.
That's not all though. To ensure the measure works as intended, it'll be necessary to align pension input periods (PIPs) with the tax year, from next April.
Without going into details, the transition is going to be complicated; especially for schemes which have selected some PIP end date other than 5 April, for example to align with their scheme year end.
Indeed, this is probably the reason why the old system, where pension contributions were assessed on a tax year basis, was abandoned at A-Day: I've struggled to think of any other rational explanation.
PIPs have always caused problems. AA calculations are often done manually today. HMRC never managed to provide an online system which could cope with split PIPs, as were created the first time the AA was hacked down, to GBP 50,000 from April 2011. How can this latest round of complification be justified?
The Government has openly stated that it is being done simply to fund an Inheritance Tax break, allowing a couple to leave up to GBP 1m to their children, including the family home.
Nothing to do with pensions policy - though it could be taken as a tacit admission that it was a mistake to have scrapped the tax year basis in favor of PIPs. Far from stimulating long-term saving - which the Chancellor actually said was inadequate and needs to be fixed - it adds an extra cost burden.
Getting it wrong can be costly. As the long goodbye to contracting-out has shown abundantly, a policy initiative which might have seemed a good idea at the time it was conceived can be a colossal albatross for many years.
In the early years the decision for a final salary scheme sponsor to contract-out of the state additional pension was almost a no-brainer. In exchange for a big cut in national insurance contributions, all they had to do was to promise to provide a guaranteed minimim pension (GMP) which was comfortably within what they planned to provide anyway.
Successive governments realised too much was being given away, and so the advantage was whittled down and down to the point where today contracting-out is generally reckoned to be costing the sponsoring employer.
It's finally ceasing next April, but not before a major financial headache for sponsors called 'GMP reconciliation'.
The PIP saga is, thankfully, not a mistake of quite the same order of magnitude. But if we truly want a viable long-term pension saving culture to take hold, and automatic enrolment succeed, we cannot afford this constant political interference. It's got to stop.
Which leads me to the glimmer of hope which appeared yesterday. The Treasury has published a Green Paper entitled "Strengthening the incentive to save: a consultation on pensions tax relief", which asks eight fairly open questions without making specific proposals for reform.
Cynics might say this is a typical government response to good ideas put forward by others: without acknowledging they have merit, absorb the message and repackage them as the government's own.
The pensions industry has been remarkably united in calling for an independent commission to develop the kind of long-term planning strategy to which politicians, with their horizon fixed at the date of the next election, seem unable to commit themselves.
It could prove a mere diversion; a way of recuperating energy and interest from the industry. But taken at face value it is an opportunity for a radical review which the industry must seize, because we simply cannot stagger on as we are. There is only so much stick a body can take before it collapses.
Writtenby Ian Neale, Director, Aries Pension & Insurance Systems Ltd
