At the beginning of this year, the conversation about tax relief turned into something of a cacophony, yet it seems to have diminished to little more than a whisper following the absence of any significant announcements in the Chancellor’s March Budget.
To recap, the UK’s private pensions system is structured around the principle that tax relief is granted up-front, investments are largely untaxed, and then retirement proceeds are taxed as income – ‘exempt, exempt, taxed’ or EET as it has become affectionately known. Isas work in the opposite way, with money paid in after tax, but tax-free on taking the proceeds – taxed exempt, exempt, or TEE.
To a large extent, the debate centred on this issue – whether pensions should be altered to a model more akin to Isas. Many compelling arguments were presented for each side, and there were a number of compromises put forward, such as a flat rate of tax relief.
So why write about this now, if the government has confirmed that there will be no further changes?
In reality, there was a qualification in the announcement at the Budget, insofar as there would be no changes “at this time”. There is nothing sinister about that. It simply acknowledges that the reasons for the consultation in the first place largely remain, that is, the annual cost continues to rise and is equivalent to perhaps a third of the UK’s Budget deficit – most tax relief goes to higher earners, so many people do not see it as an incentive to save.
You could probably add to that list that the current system of tax relief is becoming increasingly complex, with a restrictive lifetime allowance (LTA) and an unpredictable correlation for higher earners between people’s income and the tapered annual allowance. Such iterative changes are clearly designed to contain the costs of tax relief, and will be effective in doing so, but add layers of administration for employers and their employees in managing their pension affairs, year-on-year.
Despite there being no further changes to tax relief announced, we did see the proposed introduction of the Lifetime Isa (Lisa). This in itself has become something of a discussion in the debate about any move from an EET to TEE model for pensions. Some say it is the Trojan Horse which will slowly replace the current pensions system.
Whether or not that is the case will be something for the current, or indeed a future, government to decide, as that would almost certainly have to be a fairly long-term vision.
Some say the Lisa provides a direct challenge for pensions and auto-enrolment (AE) now, with extremist views suggesting almost everyone under the age of 40 will opt for this in favour of their qualifying workplace pension. I do not buy that. I have not seen any evidence that the help-to-buy Isa – arguably a micro version of the same thing – has increased pension opt-outs. More importantly, AE is not predicated upon people making discerning judgements about the relative merits of the pensions tax wrapper; rather, it relies on the behavioural science behind the nudge. The policy then counts on trustees and governance committees to ensure that the workplace pensions into which people are enrolled are adhering to the rules and providing value.
