The uncertainty created by politics in pensions makes advice really tricky. Chris Budd wrote an excellent article on this and one which inspired me to pen a few words.
Having spent time attending the party conference season, I started to jot down the consensus manifesting itself around pensions policy. I, too, chose the topical area of pensions tax. If I include in the mix suggestions made earlier this year, the position is actually very clear…
Tax relief will continue to be granted at marginal rates, although they themselves are liable to change, along with the bands within which they are calculated.
Also, tax relief won’t remain at marginal rates, instead, replaced with a simple flat rate of between 20% and 30% – most likely 33.333333%. The deal will be ‘buy two or two and a bit or three and get one or a bit under or a little over one free.’ Yoyo pricing will also be central to the marketing, I suspect.
Auto enrolment at 8% will be even easier to explain: 3% from your employer, between 3.3335% and 3.75% from the employee and a round 1.25% to 1.6665% from the taxman. The only slight complication is that this isn’t 8% of basic or total earnings, rather, a band of earnings which is currently under review.
With a flat rate of tax relief, salary sacrifice will be even more straightforward, with almost everyone having to start completing a tax return. That will be a helpful simplification, allowing a more sporadic and unpredictable reciprocal exchange of money between individuals and the government.
So, in summary, higher rate tax will be removed for those earning over a certain salary, but everything else remains unchanged.
Having cleared that up, you then have the lifetime allowance, for which the position is again centring around one solid consensus: reduce it to £1m, leave it the same, increase it towards its previous level and remove it altogether in favour of a reduced annual allowance of £10k (or £20k or £30k). To be fair, the lifetime allowance has been largely untouched (apart from almost every year since it was introduced) and at least there are no protected arrangements in place to worry about (apart from the many thousands of people for which there are).
Tax free cash is clearly untouchable, so will be enshrined as it is (and phased out over time).
So clients can march forward with certainty that the choices they and their advisers make now will be good ones; the reverse of which is the point I believe Chris makes, and with much greater experience than me.
I write much of this tongue in cheek, of course, but hopefully it finds its point.
Automatic enrolment was built on consensus and, so far, it’s been a great success. It’s been tinkered with, for sure, but the fundamentals have remained the same under the tenure of three different parties now. There’s something to be said for that…
“For professional advisers only: everything can go up and down at any time, often unexpectedly. Nothing mentioned above constitutes anything remotely resembling advice. Any financial decisions made as a result will almost certainly be ill-informed.”