The blog below is the text of a response I wrote to the treasury consultation document. Whilst reproduced here it was prepared without consultation within the firm or by our clients and is a personal view only. The consultation is now closed, but the questions and my responses are recorded for context, and in the light of yet another raft of changes to pensions’ legislation.

I write personally, but as the director of a firm of Chartered Financial Planners, providing bespoke advice to individuals, particularly at the point of retirement.

In “Strengthening the incentive to save: a consultation on pensions tax relief” HM Treasury invited responses to eight questions. My responses to these eight questions are below, but I find these questions very restrictive and do not feel they give an adequate opportunity to respond to the core issues. To this end, I also seek to explain my preferences, and the thinking behind them. I understand HM Treasury’s preference to collate responses methodically, and hope my comments can be accommodated. I had already raised some of the issues below with my MP, even before the green paper was published.

I will be sending a copy to Sam Gyimah MP, with whom I had raised this matter and by coincidence had met the Friday after the Chancellor’s budget announcing the consultation. Sam Gymiah MP had forwarded me a copy of letter from David Gauke – of course I am quite happy to give my views, though am concerned that having tasted the additional revenues raised by “pension freedoms” this strategy will be extended to all UK pension savers. I would dispute that the tax system has not been reviewed for ten years – the submissions I prepared highlight how the system has been reviewed every year in the last ten – sometimes more than once!

The most important consideration should be legislative longevity: for ten years (or more) pensions have been a political toy, and changes made as a result of the consultation should be protected in law.

The Government should be honest: if pensions’ tax relief is not affordable, it should not be offered; but if withdrawn the new regime should be left alone. Sustainability and stability is what we desire most.

Even as a pensions’ professional it is only when I see the volume of changes written down that I appreciate the enormity of tinkering that has occurred. In the past decade since “Pensions Simplification” we have seen innumerable changes. I prepared a summary as an appendix for comparison, which is summarised below, and can be seen here: http://cr3.co/PensionsTinkering (note capitals). This is obviously not to be relied on (it may not be totally accurate, and is simplified), but I aim to demonstrate: pensions tinkering has become the norm, rather than an exception.

The current system would be simple if it wasn’t for the tinkering, abolition of the lifetime allowance, with the continuation of a static annual allowance would immediately reduce the complexity of the work we do. The principal reasons for complexity outside of these two issues relate to the dozen or so regimes we have,principally dating from 1970, 1988, 1995, 2001, 2006 and then the annual changes thereafter. A new regime that slots on top without any consideration to prior regimes would lead to further complication – this is what has happened in the past.

To what extent does the complexity of the current system undermine the incentive for individuals to save into a pension?

Putting affordability to one side, it is my experience that it is easy to convince an individual to save into a retirement plan, but I do deal with wealthier, more engaged clients. The complexity of the current system is a disincentive though as when asked “Might the rules change?” the answer, based on prior experience, is a resounding and certain “Yes”.

Do respondents believe that a simpler system is likely to result in greater engagement with pension saving? If so, how could the system be simplified to strengthen the incentive for individuals to save into a pension?

Saving is driven principally by affordability, tax incentives do help, but are not imperative. Restrictions on withdrawal also help long-term savings, reducing theability to raid the pot. 55 is a sensible minimum for retirement planning. Empirically, I suspect that many individuals have been encouraged to save moredue to pension freedoms – it has been evidenced that from a behavioural finance perspective removing barriers can increase savings behaviour.

Would an alternative system allow individuals to take greater personal responsibility for saving an adequate amount for retirement, particularly in the context of the shift to defined contribution pensions

I find this question bizarre, as it is asking to compare the current system with an undefined alternative system. What is known is that the shift to Defined Contribution pensions (from Defined Benefit) has moved responsibility from the employer (and state via abolition of contracting out) to the individual. Why is “greater personal responsibility” desirable, and is the inference we should have more than what we have currently?

I think the current system has adequate personal responsibility, apart from those fortunate enough to have access to a final salary scheme.

Would an alternative system allow individuals to plan better for how they use their savings in retirement?

Again it is hard to argue something that is counter-factual. A TEE system, with governmental top-ups, could have benefits and disadvantages over the current system, what is important is a simple system free from tinkering. This would help planning and potentially boost confidence

Should the government consider differential treatment for defined benefit and defined contribution pensions? If so, how should each be treated?

Defined benefit schemes, which are now almost exclusively in the public sector, are overwhelmingly privileged in the current system. Annual allowance and lifetime allowance rules are more favourable than DC equivalents. Moreover the obligation is an employer (or tax paying public) responsibility rather than on the pensionholder, this putting DB schemes at a significant advantage to DC schemes.

Whilst I do not welcome penalising those fortunate enough to have a DB scheme, an erosion of the benefits in DC schemes with no compensatory changes to DB (which has largely been the case in the last decade) would be most unwelcome.

What administrative barriers exist to reforming the system of pensions tax, particularly in the context of automatic enrolment? How could these best be overcome?

I have limited experience of automatic enrolment, dealing principally with business owners to whom this may not apply. Nevertheless I cannot see any difference in the barriers that would not also be present in the context of a general reform of DC schemes. However it seems perverse given the time and expense of communication and building the auto-enrolment framework to ditch the current system altogether.

How should employer pension contributions be treated under any reform of pensions tax relief?

If a change is made to EET (which I do not support) employer contributions should be treated in the same way; the benefit is the matching not the tax relief. National Insurance is problematic, NI would logically need to be levied in a TEE system.

How can the government make sure that any reform of pensions tax relief is sustainable for the future?

I would hope that the financial basis that governs the sustainability will beconsidered by HMT supported by data from the OBR. The political and legislative sustainability of any new regime would be defined by future political will, and a commitment to leave long-term savings alone, something that is largely beyond the control of anyone. It is this latter point that I feel is the most important.

Appendix

(Massively summarised and prepared in haste – not to be relied upon)

Lifetime allowance (the largest fund value that can be accumulated without penalties):

  • 2006: £1.5m, indexation agreed, rose to high of £1.8m in 2011
  • 2012: back to £1.5m
  • 2014: down to £1.25m
  • 2016: down to £1m

Annual allowance (the largest allowable contribution without tax penalty in a year):

  • 2006: £215k, indexation agreed, rose to high of £255k in 2010
  • 2010: £50,000 with complex ‘anti-forestalling rules’
  • 2014: £40,000
  • 2015: introduction of an “MPAA” of £10,000 for those flexibly accessing pensions
  • 2016: £40,000 apart from those earning over £150k which could be as low as £10,000

Compulsory annuitisation rules:

  • 2006: need to annuitise abolished
  • 2010: need to annuitise abolished (even though it had been abolished before!)
  • 2011: ditto
  • 2014: need to annuitise abolished yet again to huge media fanfare

Drawdown rules:

  • 2006: Unsecured Pension (USP) pre-75, Alternatively Secured Pension (ASP) post-75. USP allowed 55% minimum of a variable “GAD” rate and maximum of 120%. ASP increased minimum to 90%, with same maximum.
  • 2011: USP/ASP scrapped, everything became either “Capped” Drawdown with a limit of 100% of GAD or, if guaranteed income sources were more than £20,000 “Flexible” Drawdown offered unlimited access
  • 2014: Capped drawdown limit increased to 150%. Flexible Drawdown income requirement down to £12,000
  • 2015: All Flexible Drawdown became Flexi Access Drawdown, unlimited access to all over 55 introduced under same regime, with no minimum income requirement. Capped Drawdown scrapped for new entrants, but protected for those pre-April 2015 members. Uncrystallised funds pension lump sum also introduced which allows income from pension funds with only 75% of the individual’s normal tax rate paid

Tax on death:

  • 2006: 0% if not “crystallised” (benefits, i.e. cash or income taken), 35% if in not-crystallised pre-75, over 75: too penal to be practical (55% + inheritance tax in most cases)
  • 2011: 55% if over 75 or crystallised pre-75, uncrystallised tax-free pre-75
  • 2015: 0% if under 75, taxed on recipient thereafter. No distinction between crystallised or uncrystallised

“Protection” regimes (for those with larger funds):

  • 2006: Enhanced and Primary
  • 2012: Fixed Protection
  • 2014: Fixed Protection 2014 & Individual Protection 2014
  • 2016: Fixed Protection 2016 & Individual Protection 2016 (assumed)
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