NEWS | Pensions
Now it might be pointed out that few people with million pound pension pots choose to spend the whole pot on an annuity. But the same factors which have led to falling annuity rates mean that the return you can get from £1m invested in a drawdown product have also fallen considerably. Greater longevity and falling returns mean that a £1m pot no longer means a lavish lifestyle in retirement, regardless of how it is invested. In addition, the current policy of linking the £1m limit in future to increases only in the CPI means that as wages and investments grow, more and more people will gradually be affected by these steadily reducing limits. As well as the repeated cuts to the
Lifetime Allowance, there has been a cut to £40,000 in the maximum annual amount that can be contributed within tax relief limits. This has been compounded by the introduction in 2016 of absurdly complex ‘tapering’ rules on the annual allowance for those with taxable income plus employer pension contributions in excess of £150,000 per year. These rules have made life particularly complex for those with unpredictable incomes such as the self- employed and those for whom bonuses are a significant part of remuneration. In sum, therefore, we have seen an
extraordinary period of change in the tax regime around something which is meant to be a long-term investment. In addition, the tax breaks for rival investments, notably ISAs and the new Lifetime ISA (LISA) have been substantially increased. From next year it will be possible to save £20,000 per year across a range of ISA products, and the new LISA will give younger savers a top-up equivalent to basic rate tax relief, tax free investment growth and tax free withdrawals for a house deposit or at age sixty. It is hard not to suspect that the Treasury’s long-term destination is a system where pension tax relief is gradually phased out and ISA-style treatment becomes the norm.
So what should be done instead? In the short-term, we would all breathe a huge sigh of relief if the Chancellor Philip Hammond did not even mention pension tax relief in his Autumn Statement. Whilst there are plenty of things wrong with the current system, a period of stability would be enormously welcome. During the election campaign the Conservatives said
18 DIRECTOR OF FINANCE
that apart from pre-announced changes to tax relief there would be no further changes in this Parliament. If the Chancellor were to reaffirm this commitment it would be exceptionally welcome. If we are concerned to do more to
tackle under-saving, there are other ways that would be more effective than tweaks to the rates and structure of tax relief. The most obvious way forward is
to build on the undoubted success of automatic enrolment. Latest estimates by the Department for Work and Pensions suggest that around ten million people will be newly saving (or saving more) as a result of the legal duty on employers to enrol their workforce into a workplace pension. This growth in pension scheme
membership is a huge transformation since 2012 and comes aſter decades of decline. But the big unfinished business of
automatic enrolment remains getting contributions up to a more realistic level. As things stand, the mandatory contribution from employer and employee will reach just 8% of a band of qualifying earnings by April 2019. Aſter that, there is no plan to get savings levels up to more realistic levels. When this is compared with the 20% of salary or more which would have been contributed into a final salary pension scheme in the past (even ignoring deficit recovery contributions) it is clear that the next generation of workers is heading for a much worse retirement than their parents’ generation.
dofonline.co.uk
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