Looking at the package of changes over the last two years there has been far more about which to feel positive than negative. The previous Labour Government’s proposals for changes to pensions were nothing short of horrendous. The complex rules they wanted to introduce on contributions and incentives demonstrated that their stance on pension incentives was formed from erroneous perceptions. Trying to reason correctly from that starting point was always going to be a recipe for disaster. We almost ended up in a position where the Government was forming solutions to problems that didn’t exist.
So despite the positive changes of the Coalition, why does it feel like a case of survival? Another Budget has come and gone and it was no surprise that the run up to it was full of the usual speculation surrounding the tax treatment of pensions. To a certain degree this year’s speculation was understandable. Chief Secretary to the Treasury, Danny Alexander, added copious amounts of fuel to the fire by publicly stating his belief that tax relief for higher rate taxpayers should be halved.
In the end, the changes announced by the Chancellor confirmed the tightening of rules on transfers to Qualifying Recognised Overseas Pension Schemes and the closure of a mechanism which allowed for significant contributions to be paid by employers to the spouse or family members of their high earning employees. It was a relief to see that the key tax reliefs offered to pension savers were largely left untouched.
As the dust settles on this period I am sure that many providers will confirm that this period of speculation will have been good for business. For our part, the run in to the Budget and the speculation around possible restrictions in higher rate tax relief, tax free cash or the annual allowance made people react sharply. We experienced significant increases in both individuals making contributions to their pension and choosing to take their tax free cash lump sum.
So you could argue that all is well that ends well. The problem I have with that is it smacks of short term thinking. This type of saving behaviour is driven by a short term fear of change rather than a long term commitment to saving. I, like most, have kids to feed and a mortgage to pay so I am not complaining about people giving us more business. However, we must accept that this sort of speculation damages confidence in pensions and causes abnormal behaviour in pension savers. Perhaps more importantly, abnormal spikes in contributions create abnormal spikes in the cost of tax relief. This not only costs the Treasury, but also provides statistical ammunition for opposition parties and lobbyists to make their case for change. All in all it will we will be storing up problems for the future and this can only lead to bad news over the longer term.
As an industry we have got used to dealing with change. I was copied into an email from a colleague to an adviser recently on a fairly simple point on a simple issue regarding changes to triviality. This email highlighted in a handful of lines that, as an industry, we now accept that change is normal. In this email my colleague highlighted that there have been at least four (three that apply to personal pensions) changes to triviality rules in the last seven years:
I appreciate that pension investors should not save with any consideration given to triviality limits, they should be aiming well north of that. However, if you also look at the changes to contribution limits, benefits and tax treatment across recent Governments then we all know it adds up to a lot of change.
If the Government wants to restore confidence in pensions and discourage any unnatural behaviour it must consider building on the good work it has started and introduce a moratorium on changes to the key pension rules on tax reliefs and benefits. The key aspects of pensions legislation that should benefit from this protection are the rules on tax relief on pension contributions, the annual allowance, the lifetime allowance, the tax free lump sum and death benefit rules. This would have the benefit of taking these crucial areas for pension investors outside of the political bargaining that goes on before each Budget. Importantly, a ten year moratorium on rule changes would give pension savers the certainty that they deserve when committing to long term savings. It would lay the foundations for an environment that feels a lot less like a game of survival and more like an environment where long term planning could and should be encouraged. In the early 1980s Ronald Reagan commenting on Congress and the federal budget said, “Cures were developed for which there were no known diseases.” We almost went down that road before, it’s a path best avoided.
Billy Mackay
Marketing Director A J Bell