Strengthening the incentive to save: a consultation on pensions tax relief was produced as part of a budget announcement in July by George Osborne. The document introduces a consultation, ending this month, on what pensions should be like for the future. I have many views, but the one I am most passionate about is to build a regime that can have longevity: we cannot allow pensions to become a political toy any longer, and changes made in the near future should be protected in law for the next few governments at least.
The obvious changes are a reduction in tax relief, and possibly a change to the Exempt-Exempt-Taxed regime (so named as contributions are tax-free, as is growth, with tax being levied on exit). The consultation does intimate TEE is a strong contender for an alternative (which is how an ISA works).
The Government should be honest: if pensions tax relief is not affordable, it should not be offered; but once withdrawn it should be left alone for a decade or more.
In the past decade since “Pensions Simplification” we have seen innumerable changes. I prepared a detailed table for comparison, which is summarised below. This is obviously not meant to be taken as advice, and should not be relied on (it may not be totally accurate, and is simplified), but I aim to prove a point: pensions tinkering has become the norm, rather than an exception:
- 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.
Let me be clear. No one ever needs to buy an annuity again.
George Osborne, Chancellor, 19th March 2014 (8 years after compulsory annuitisation was truly abolished)
- 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 indvidual’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)
There’s lots more examples I could cite, but I hope I have made my point – to encourage long-term savings, a beneficial tax regime is helpful; but continual tinkering erodes sentiment and this does more harm over time. We need to have a set of rules that are clear, and are protected for the indefinite future – then we might see a strengthening of the incentive to save.