26 October 2017
They’re coming for your pension (again!)
Pension contributions are the soft target for revenue raising.
by Frank O’Nomics
We could be forgiven for getting excited by the recent improvement in the budget deficit. The figure for September was the lowest for that month since 2007, some £700mn lower than for the same period last year. If this improvement were to be extrapolated over the full year the deficit would be £16bn lower than the Office for Budget Responsibility forecast. Surely then there is scope for the Chancellor to end austerity in his 22nd November Budget and commit to some increase in public spending? Sadly, historic data is likely to be an unreliable guide. There has been beneficial impact from the effect of inflation on VAT receipts and earlier than normal self-assessment tax receipts, but both are likely to be one-off factors. Indeed, inflation will increase future interest payments on index-linked government debt, which will also become more expensive to fund as interest rates finally rise. Despite better than expected GDP figures this week, the outlook for government revenues will be damaged by potential revisions to future growth forecasts hinted at recently by the OBR – all due to the prevalence of low productivity growth. As a result, despite the improvement in the current deficit, there is very little room for manoeuvre. Any increases in spending concessions will have to be paid for, as will any tax concessions, such as those seeking to rebalance the burden of tax between generations by cutting National Insurance for twenty and thirty year olds. We already know of the high costs of increasing the salary threshold for student loan repayments, and spending on education and public sector pay is likely to be increased from previous forecasts. This begs the question of: how can such measures be funded? The answer it seems is, once again, to reduce tax concessions on pensions contributions and entitlements. If this is the case, should we rush to maximise contributions now?
If we agree that the government is under huge pressure to spend more, but faces a hole in its revenues, it becomes clear that they have to raise money somewhere. If they take money away from spending on schools it will be noticed and there will be a great outcry. Yet if they reduce the tax relief on pension contributions there will be barely a ripple. Consider a couple where both work. They each have up to £40,000 that they can put into their pension tax free, and a further £20,000 that can go into an ISA. £120,000 is a huge amount for most households to find to put into savings, so to inhibit one part of that will not cause huge voter dissatisfaction. The Treasury likes ISAs, because they get the tax on income now in return for allowing tax relief over time on capital gains. Pension contributions, on the other hand take money away from the Exchequer now. Hence the shift to encouraging saving in ISAs rather than pensions. It seems likely that the £40,000 pension allowance will be reduced further to help the government’s books to balance in the short-term. Mr Hammond may even try to mask the impact by allowing more to be saved into an ISA by way of compensation. In addition, the point at which the tax benefits of pensions contributions start to taper is also in danger of changing so that, for example, instead of starting to taper once earnings exceed £150,000 the level could be brought down to £100,000 and the rate of taper could be increased.
There also a danger that the Lifetime Allowance limit of £1mn could also be reduced. This limit has been lowered successively over a number of years and most would assume that it will now be left alone – but once again, for the vast majority of people, £1mn sounds a great deal of money, and most pension pots will not hit this level. However, if you think that a final salary scheme that pays £50,000 per annum is, on official calculations, worth £1mn as a pension pot then it is not that big a number. If we further take account of the fact that that those on a final salary scheme that pays £35,000 per annum are being regularly offered in excess of £1mn to opt out, then the Lifetime Allowance starts to look like a more modest sum.
Getting the right regime in place now could be very lucrative for the Chancellor. Pension freedoms and the high levels offered to convert from a defined benefit to a defined contribution scheme meant that 80,000 made the switch last year, and the number could be nearer 100,000 this year. Yet there is still a long way to go. Deferred scheme members, numbering some 5 million, will be made aware of the transfer values of their pensions and this will encourage many more to act – some of whom will be close to the Lifetime Allowance limit which could trigger further income for the Treasury. The dividend produced by reducing the limit may then be very large.
Discouraging pension contributions at a point when the government has been trying to encourage people to save via auto enrolment might seem somewhat strange. However, for the majority, auto enrolment will not put them anywhere near the limits even after a new schedule of reductions. Pension contributions are then a soft target for a Chancellor with little else to turn to. Similarly, while reducing the Lifetime Allowance limit again, would seem to run counter to the mission of encouraging people to save for a comfortable retirement, it would generate little opposition. What can we do about these potential changes? The short answer is nothing, but if the changes are to be introduced from next April it may be advisable to get into a position where you can maximise your tax free pension contributions in the current tax year.
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