Unfair tax treatment is normally hard to defend, so the first pensions issue I feel ought to be fixed is the ‘net pay scandal’, which has been going on since the advent of automatic enrolment.
More than a million low-paid workers have been auto-enrolled without benefiting from tax relief on their pension contributions. Many, earning between £10,000 and £12,500 pa, are members of master trusts operating Net Pay Arrangements, whereby tax is applied to net income after deduction of pension contributions from gross pay. If net income is below £12,500 there’s no tax to pay - but no tax relief on the pension contributions either.
This is widely recognised as unfair, and also discriminatory: about 75% of those affected are women. Even more could be caught when the age threshold is lowered from 22 to 18 and the lower earnings threshold is scrapped. The Conservative election manifesto went as far as promising to “conduct a comprehensive review”.
There’s already a solution for this, made well known to HMRC, which could use PAYE RTI data. Via an annual end-of-year reconciliation using the P800 process, HMRC could provide tax relief equivalent to that which would have been received via the alternative Relief at Source (RAS) route that personal pension providers are obliged to use.
An unfair aspect of the pensions tax legislation, which affects pension contributions by earners towards the other end of the pay scale, is the now-notorious Tapered Annual Allowance. In the run-up to Christmas the outgoing government scrambled to address the deterrent effect upon senior NHS clinicians, who felt that in view of the potential tax penalty, working overtime just wasn’t worth it.
Complicated proposals were made and re-made. What emerged from the wash was a plan whereby eligible NHS Pension Scheme members would not only be able to elect for the Scheme to pay to any Annual Allowance charge, but also to receive a cast-iron guarantee of an extra salary payment upon retirement to cover the amount deducted from their pension to repay the Scheme.
This was and is only a temporary fix. The Taper should be scrapped because it’s simply unworkable. It’s only a slight reformulation of the ‘Special Annual Allowance‘ which was scrapped (for the same reason) by the incoming Coalition in 2010. Again, the Conservative Party manifesto promised an “urgent review”.
If a more permanent ‘solution’ does emerge for NHS clinicians, it’ll be very difficult for the government to resist demands for equal treatment from other public sector workers potentially subject to AA charges. Members of the armed forces, the police, firefighters and teachers have already been queuing up.
The Government will then have some further difficulty in defending unequal treatment of members of private sector schemes, for whom at the moment no such special treatment has been proposed. As they peer into that can of worms, more unfairness is exposed, such as the Lifetime Allowance (LTA) charge threshold.
£1.055 million sounds like a sum most pension savers can only dream about, but from a money purchase pot of that size, an index-linked pension of only half the amount available from a defined benefit scheme can be obtained without paying a Lifetime Allowance charge. It’s all to do with a number called the valuation factor, and how annuity prices have plunged since A-Day.
Meanwhile the undoubted mass appeal of pensions dashboards is dimming as their realisation appears almost as far away as ever. As a way of finding out how much you’ve actually saved in a pension, the proposed Simpler Benefit Statement has pushed dashboards to one side, it seems. Still, there’s a doubt about how much simpler the result will actually be, given the British penchant for caveats, terms and conditions.
All agree that greater engagement of savers with their pension arrangements is desirable. The government should retain that as a watchword for reform, along with that other pillar of the zeitgeist, ‘sustainable’. Engagement is linked to the availability of advice though, and there’s another problem.
The advent of flexible access ought to have stimulated an expansion of the advisory sector, but the opposite has happened. Transfers from defined benefit schemes are becoming harder to achieve, especially with the FCA bearing down. This illustrates perhaps the biggest problem of all: there’s plenty of guidance on the web, but more than what they could do, people want to know what they should do.
People need advice. We might wish above all for a National Wealth Service (NWS): a network of financial advice centres. MAPS could deliver this.
Ian Neale, Director, Aries Insight
