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What now - pension reform post Brexit?

Changes at the top of government have filtered through to the DWP with a new face responsible for pensions.

Richard Harrington the Under Secretary of state for pensions replaces Ros Altman the former pensions minister – which some see as a downgrading in importance as far as pensions are concerned.

A number of issues are likely to be at the top of Mr Harrington’s to do list but with the Government’s agenda clearly focused on dealing with Brexit is there a danger that some of these may get kicked into the long grass?  Some key issues include;

Pension Tax Relief

Most industry experts were surprised that the Treasury left higher rate tax relief on pension contributions unchanged in the Budget. The rhetoric prior to the Budget, along with media hype, led most of us to believe the current system of marginal rate tax relief was ending and being replaced with either a flat rate of tax between 25-30% or more radically stopped altogether with benefits being made tax free in line with ISA rules. 


What emerged from the Budget was a new “Lifetime ISA” running alongside existing ISAs rather than any reform to pension tax relief. However, many believe this initiative is a strong indication of the direction the Government intends to travel when looking to tackle this issue over the longer term.

However, other former policy makers believe insufficient tax incentives will lead to savings apathy for retirement planning and potentially undermine the auto-enrolment programme. This issue needs addressing sooner rather than later to provide greater certainty and sensible long term strategy for everyone involved in their retirement planning. Even if austerity is being relaxed (according to recent government speeches) the desire for the Treasury to save money without upsetting voters must be very tempting and abolishing higher rate tax relief could save a significant sum of money for the Treasury. So it won’t be a great shock if either of the two options are reintroduced in this year’s Autumn Statement. 

Lifetime Allowance

The cost of pension tax relief is also limited by the Lifetime Allowance first introduced in 2006 when the limit was £1.5m. It gradually rose to £1.8m over five years but in tax year 2012/13 the limit was reduced back to £1.5m. It currently stands at £1m. The question posed - is this limit now too restrictive and is having a lifetime allowance really necessary?

To illustrate the point, a lifetime annuity for someone retiring at age 60 based on replicating the benefits provided in a typical Defined Benefit arrangement– a pension in payment escalating at 3% a year with a 66% spouse’s income, would mean restricting the starting annuity to a modest £25,000 a year.  Whilst this amount of pension would seem more than adequate for a significant number of retirees, for many others it makes saving for retirement via a regulated pension scheme somewhat uninspiring. Whilst the lifetime allowance was intended to limit the size of pension pots that could be taken without paying any additional tax, for the majority of those currently saving towards retirement this seems an unnecessary restriction when the amount of tax relief available on new contributions is also restricted by the Annual Allowance, which has also seen dramatic cuts since 2006!

So any future reform to lessen tax relief on pension contributions may be sweetened by reform to or even abolition of the Lifetime Allowance.

 

 

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Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority.

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Stonehaven UK Limited and MGM Advantage Life Limited, trading as Canada Life, are subsidiaries of The Canada Life Group (U.K.) Limited. Stonehaven UK Ltd is authorised and regulated by the Financial Conduct Authority. MGM Advantage Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority.