BLOG: Meddling in the unknown

Written by: Claire Trott, Head of Technical Support, Talbot and Muir
With the election looming and the chances of a single party Government slim to none, what will happen to the pension reforms that have been so well received by the general public?

Pensions are top of the news and on many people’s lips. Pensions simplification in 2006 or 2011 – when the need to annuitise at age 75 was actually removed – never had people this excited. The new Pension Freedoms really have captured the imagination of the nation. The question now is whether this all be undone with one or two ill thought out policies?

Whatever flavour of Government we end up, little reprieve seems on the cards when it comes to tax, as all the main parties have tax relief in their sights. The big issue with meddling with tax relief is that there is little or no understanding of the complexities of administering changes.  Not only that, generally there will be some form of protection in place for those already saving, such as in 2009 when Labour first tried to cut tax relief for high earners. This was so complex and involved so many variables even experts struggled to get to grips with the rules for clients with multiple savings plans and income streams.

All the complexities lead to uncertainty about the current and future value in contributing at all and will inevitably put a good number of people off saving into pensions, even if they wouldn’t be contributing anywhere nearly enough to be affected.

Both the Conservatives and Labour parties want to cut tax relief for those earning over £150,000 but as we saw in 2009, this could drop again to £130,000 or even lower. It was calculated over the last three years of a person’s earnings and so hit people who had a sudden spike in income, such as a large bonus payment, as well at those that it was meant to catch.

The Liberal Democrats want to try and make it fair for all and introduce a flat rate of tax relief on pension contributions, while retaining the contribution levels currently allowed. This sounds the simplest and fairest option of the three, but this is where a great headline falls down in the detail. People receive pension contributions from their employer. This isn’t taxed as income so it gives the individual tax relief on these contributions. These employer contributions would need to be factored into the calculations when working out the flat rate relief. In addition, many schemes allow pension contributions to be paid by the employer on behalf of the individual in lieu of salary, called salary sacrifice, which also saves National Insurance contributions. Then there are those who have a final salary pension scheme, where the benefits received are not calculated in relation to the contributions paid. So restricting tax relief on these pensions will not necessarily be restricting benefits, causing further complications with this option. If these proposals go ahead, people could end up receiving a tax bill for some or all of their personal or employer contributions, if they are earning more than a set amount in one month or one year.

All of this leads back to the assumption that those making these policies do not have a handle on the impact their sweeping statements have on those who have to deal with them day to day. I just hope that whichever party or coalition comes to power, they think long and hard before they start to introduce more pension reforms.

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