So here we are into 2013 and the debate has been put to bed for another year (or at least until the Budget in March?) - wrong! Just a few days ago the Labour Party announced their plans, should they get back into power, to remove higher rate relief for those earning in excess of £150,000. This would involve a tapering mechanism to avoid a cliff edge situation, a lot like Alistair Darling’s plans, which were reversed by the Coalition Government. The justification was that the money saved could be used to create a job guarantee scheme. Then, just to finish us all off, David Milliband commented that pensions tax relief should be limited to £26,000 per annum – equating to the national average wage (interestingly, if this really was a reference to tax relief and not to a cut in the Annual Allowance, this would equate to an increase in the reduced Annual Allowance from £40,000 to around £58,000)
Now the arguments over the rights and wrongs of pensions tax relief can be complex and massive reports could be (and have been) written. This article is my take on the issue and by necessity is really a summary of some of the issues
So where do we start – let’s look at some of the big questions
Now I think that most people are agreed that saving for retirement is a good thing, We are living longer, which in turn means that an ageing population has fewer tax payers to fund the retirement benefits of those retiring. As such the State will be unlikely to provide a level of income that is more than a basic safety net.
My observations are:
For me the tax relief model has a sense of logic about it and this was echoed in a blog recently published by Dr Eamonn Butler of the Adam Smith Institute – he argues that tax relief is not just a subsidy to encourage saving, it is the logical way of doing it. If we are to be encouraged to defer the consumption of some of what we earn today then it would be logical that we do not pay tax on it twice – once now and once when we take it in retirement. It also follows I think that the tax relief given should be at the level that tax would have been payable.
So if we agree the logic of keeping the link between the rate of tax relief given and the tax rate paid it is then down to the amount of tax relief made available.
The current (and proposed) rules put us at an annual allowance of £50,000 falling to £40,000 and a Lifetime Allowance of £1.5 million decreasing to £1.25 million
As mentioned above the new LTA provides a pension a bit above the average earnings figure and the figure of £20,000pa which the Government has said it is comfortable with for someone to access flexible drawdown is a bit below - is there a logical meeting point?
If the difference is minimal then let’s stick to the status quo – the one thing that is evident is that the pensions industry needs stability – not cash grabs to meet policy initiatives but sensible thought through outcomes that will last the test of time.
Consider the following - before Pensions simplification in 2006, the maximum contribution to a personal pension for an individual aged over 61 was 40% of the earnings cap of £105,600 (possibly with a bit of carry forward or carry back) so £42,240. What is it under the new rules announced in the Autumn statement - £40,000 pa (possibly with a bit of carry forward) but how many legislation changes has it taken for us to get back to where we started?