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The Treasury is lifting the tapered annual allowance to £200,000 from April to keep doctors taking shifts as coronavirus sweeps the country, and is consulting on changing RPI. Some big issues remain unaddressed however.
We have a brand new chancellor, and he is hellbent on making an impact, spending more than any government in the past 30 years.
But while the chancellor has reduced rates, cracked down on reliefs and lifted thresholds, he has in many cases shied away from removing those rules altogether.
This is also true for the tapered annual allowance on pensions, which has been a bone of contention between the British Medical Association and the government for months. Doctors have effectively taken action short of a strike by not working overtime to avoid high tax bills.
While some increase in the threshold had been expected, this had been rumoured to be at £150,000; the coronavirus has certainly added pressure on the government, which has now decided to lift the threshold by £90,000, to £200,000, while the adjusted income threshold is now £240,000, up from £150,000. Meanwhile, the minimum TAA for anyone earning £312,000 or more will reduce to £4,000.
The changes will lift over 90% of doctors – as well as many other high earners on DB pensions – out of the TAA, catching only the very highest earners.
The cost of this tax break for high earners with DB pensions will rise considerably over the coming years, from £180m in 2020/21 to £670m in 2024/25, the government assumes; by 2024/25, the exchequer will have lost £2.175bn in tax receipts.
At a glance
Threshold for tapered annual allowance rises to £200,000 from £110,000
Adjusted income threshold rises to £240,000 from £150,000
Minimum TAA reduces to £4,000 for those earning £312,000 and above
Lifetime allowance increases in line with CPI for 2020-21, rising to £1,073,100
Consultation on replacing RPI is published
Consultation on net pay anomaly is planned
Indirect boost to auto-enrolment savings as NICs threshold rises to £9,500 and government plans for national living wage to reach two-thirds of median earnings and to extend it to workers aged 21 and over by 2024
The Bradford & Bingley and Northern Rock AM scheme members will be transferred to a new central government pension scheme. Members’ pensions will not be affected. The government will sell scheme assets over 2023-25 subject to legislation and market conditions
Industry commentators have criticised the change in the TAA as mere ‘tweaking’, having hoped the tax could be scrapped completely.
David Brooks, technical director at consulting firm Broadstone, said: “The tweaks to the pensions taper are nothing more than a short-term sop – with complexity added to complexity for minimal tax gain. The government has over years created a preposterous pensions system that is a mess, and yet there is little energy or desire to do anything about it.”
He said the industry was exasperated by the number of allowances, anomalies and restrictions on pensions, while the big topics are left unaddressed.
“I don’t think we can blame coronavirus or a late change in chancellor for this either. It is pleasing that the net pay anomaly is being addressed, but with only a call for evidence a solution seems a long way away,” he added.
Disappointment over the lack of simplification was also felt by Steven Cameron, provider Aegon’s pensions director, although he noted the fact that the increase in the TAA is greater than expected should offer comfort to many higher earners that they will not be affected. Given Covid-19, “it’s perhaps not surprising that the single pensions change was designed to stop senior NHS professionals turning down extra work or retiring early to avoid a pensions tax penalty”.
However, for those earning above £312,000, the new annual allowance of just £4,000 makes pensions redundant, he noted.
Cameron is hoping for a wider review of pensions tax in a future Budget and consultation, with the aim to simplify “the fiendishly complex system of pension limits and allowances”.
This was echoed by Fiona Tait, technical director at financial adviser Intelligent Pensions. She said it was important not to lose sight of the fact that any saving incentives should be as simple and attractive as possible.
“The complexity of the current system should certainly be revisited, ideally as part of a wider ranging review into the cost and effectiveness of pension tax relief in general,” said Tait.
Pensions complexity remains for those on very high incomes. The fact that the highest earners are now essentially priced out of pensions - due to the lower minimum of £4,000 - could have unintended consequences, warned James Mason, a senior consultant at Aon, as business leaders will be among them.
“Could this accelerate the disconnect between business leaders and their companies’ pension plans?” he said.
RPI consultation: Govt seeks views about effects on index-linked gilt holders
The consultation, which closes on 22 April, comes after the UK Statistical Authority had proposed to replace RPI with the consumer price index including housing costs in 2019. The government’s Office for National Statistics has already moved to CPIH to measure inflation.
UKSA is proposing that the methodology for calculating RPI should be the same as that for CPIH. Monthly growth rates would be identical to CPIH monthly growth rates from the outset, while annual growth rates would differ but would converge after a year. RPI and CPIH would continue to be published separately.
A central government decision to remove RPI would not only require primary legislation, it would also affect holders of index-linked gilts issued by the Debt Management Office; the longest dated outstanding index-linked gilt matures in 2068.
These investors are mostly defined benefit pension schemes seeking to match their liabilities, with the government saying there was “substantial demand” from schemes. The consultation is therefore seeking views on the impact the proposed change would have on holders of index-linked gilts, and how this could indirectly affect the gilt market in general.
The government had replaced RPI for the indexation and revaluation of public sector pensions with CPI in 2010 but did not provide a statutory override for private sector schemes, where the index is specified in the scheme rules, at the time. As the wording in these rules varies and is sometimes unclear, a number employers keen to reduce pension liabilities have sought clarification in court since then, including BT, Barnardo's, Arcadia and more.
Tackling uncomfortable issues
The net pay anomaly, whereby low earners can miss out on tax relief if they are not in a 'relief at source' but in a 'net pay' scheme, is finally looking like it will be addressed, having not made it into the pension schemes bill or previous Budgets.
But the government has only announced a call for evidence, not published it yet.
Ian Neale, director at policy specialists Aries Insight, has little understanding for a consultation, however.
It is "disappointing to see the government is still 'calling for evidence' regarding the net pay scandal," he said. "All the evidence they need is in the public domain, and they are well aware of it all."
Last but not least, memories of the 2008 financial crisis were rekindled in the Budget. The government will create a new central government pension scheme for the members of the Bradford & Bingley and Northern Rock AM schemes, two lenders which collapsed during the credit crunch. Members’ pensions will not be affected, the government has said.
With central government schemes being funded by tax receipts, the government plans to sell the scheme assets over 2023-25, depending on market conditions and subject to legislation.
So what’s missing?
The government has once again made a big circle around flat-rate pensions tax relief. Even though a 20% pensions tax relief for all was trailed in the press by the previous chancellor a few weeks ago, few in the industry took the rumour seriously, though it had stirred hopes among those campaigning for flat-rate relief.
Gregg McClymont, policy director at master trust the People’s Pension, said pensions tax relief is the second largest tax break in the UK system, going primarily to a minority of higher rate taxpayers.
"We favour a flat rate of tax relief that would level up those paying basic rate relief and reduce the rate of relief received by higher and additional rate taxpayers. Implementing this would be complex, though, and would require substantial changes to the way that DB schemes currently operate,” he said, therefore “the Treasury would need to commission a full review of the issue”.
The other big item that was barely mentioned in the Budget is social care, where a green paper has been expected for nearly three years.
Social care is seen by many as a time bomb due to people living longer and the likelihood for care increasing. Social care is supported by local governments, but austerity measures have meant local authorities have been struggling to cope with rising demand.
Aegon’s Cameron said it was “deeply disappointing” that there was only a vague indication of how or when social care funding would be tackled.
“The government needs to urgently set out a fair and sustainable system, ideally with cross-party support, detailing what the government will pay and what individuals will be asked to fund themselves, based on their housing and other wealth. Individuals then need [to be] incentivised to plan ahead,” he said.
For Cameron, a cap on what people are required to pay is essential to avoid the fear that ‘catastrophic’ care costs will wipe out life savings and inheritance aspirations.
“With social care increasingly needed in later retirement, defined contribution pensions offer a ready-made funding solution.”