New pension advice proposals

new-pension-advice
new-pension-advice

Article by Christina

In what some people are seeing as an attack on pension savings the Institute of Fiscal Studies (IFS) has published new pension advice proposals to “even out” the tax system for pensions.

The headline proposal is to cut the current 25% tax free cash allowance element. The IFS suggests that this should be capped at 25% of £400,000 or £100,000 tax free. They argue that the tax free element only benefits the most wealthy pensioners and does nothing for those on lower pension incomes. Financial Advisers argue that this would act as a disincentive to pension savings, especially those who have saved hard into private pension schemes.

The second new pension advice proposal from the IFS is to introduce changes to the Lifetime Allowance (LTA). This is seen as a disincentive to higher earners to work longer. Especially in the NHS and other areas of the public sector. The proposal is to increase the LTA for both private pensions and defined benefit schemes. Or to introduce lifetime contribution limits. This is more welcome to many advisors.

The IFS argues that the measures would potentially encourage more older workers back into work, if they could continue to contribute to their pensions without being penalised by tax. Reducing support for tax free allowance would reduce the cost to the exchequer which could be spent on more even tax distribution. They argue.

The next proposal is to tax pension benefits at the current income tax rates, on death. Or, treating pensions as part of the estate on death and making them subject to Inheritance Tax. This would certainly raise additional revenue for the treasury. But it would penalise millions of savers who had made their financial plans based on the existing tax rules. Many financial advisers argue that this would be fundamentally unfair. It would also act as another disincentive to saving via pensions.

Finally, the IFS propose that tax relief on the National Insurance Contributions (NIC’s) paid on pension contributions is scrapped. Which would mean that pension contributions would be subject to NIC’s.

All the new pension advice proposals seem to penalise those who have saved into pension schemes and made retirement plans based on those pensions. Or to penalise those who are making contributions into their pensions. The idea is that by reducing the tax relief on pensions, the savings could be used to incentivise lower earners and help reduce their potential pension poverty. However, the report doesn’t seem to set out exactly how this would work and what the benefits would be. Only what the penalties would be to existing pension savers.

Who knows what will happen?

It may be that changes are needed. Latest figures from the Office of National Statistics (ONS) show that over 500,000 workers have left the UK workforce since the pandemic. Most of these have been older workers taking early retirement. One of the impacts of this is a reduction in the tax paid to the treasury. It may be that new taxes on pensions will need to introduced to compensate for this. Or tax incentives introduced to encourage older workers to return.

Although, at the same time research shows that 26% of over 55 year olds will still be working at 70.

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Many of these retirees who may want to return to work are being penalised, however. Latest figures show that 500,000 over 55-year-olds who are still working also withdrew money from their pensions in 2021, which was 25% up on the year before. This may be because of increases in the cost of living, or maybe to help family members. The problem is that by doing so they have breached the Money Purchase Annual Allowance (MPAA). That means that their pension contribution allowance is automatically cut from £40,000 to £4,000. Many people think this is unfair. It means that workers over 55 who are also drawing their pensions are prevented from building their pensions back up through contributions over £4,000. This doesn’t act as an incentive to attract older workers back into the workforce.

Left leaning Think Tank Resolution Foundation have also released a report along the same liens as the IFS. They say (21st February) that the employment rate in the UK is now 1% lower than it was before the pandemic. They present similar arguments to help rectify this. The first is to increase the age at which pensions can be accessed to 57 from the current 55. The second is to remove the availability of the 25% tax free cash element. Or to at least restrict the value of the lump sum. The argument is the same as the IFS. To retain workers in the overall workforce.

Neither the Resolution Foundation nor the IFS appear to have taken into account the latest figures from the government which show that another 300,000 became economically inactive after the pandemic as a result of ill health. The number of people on sickness and disability benefits is now over 5.2 million in the UK. That is nearly 17% of the overall workforce. Or 1 in 6 working age people

 

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