Dear Richard… Our wishlist for the new pensions minister

20 July 2016

With Ros Altmann, the former pension minister, stepping down from her Cabinet position to be able to “speak freely” on pensions, Tilney Financial Planner Gary Smith has chosen to follow her lead by setting out the six changes he believes the new pensions minister Richard Harrington should be making first.

Gary Smith, Financial Planner at Tilney comments:

1. Remove the lifetime allowance

“We would welcome the removal of the ‘lifetime allowance’ for pension savers, as such a limit is no longer a boundary for the rich, but more of middle England being caught in the trap, especially those in defined benefit pensions. The current level of £1million does not provide sufficient funding capacity for members of defined contribution schemes to generate anywhere near the equivalent final salary pension that could be generated without incurring the tax charge. Above all, there are far more beneficial ways of making savings for the Exchequer, such as by limiting the rate of tax relief to, say, 30% for all and through reducing the annual allowance from the current £40,000 limit.”

2. Introduction of flat rate tax relief

“Although the Lifetime ISA has paved the way for the demise of pensions, the simple 20% tax relief offered therein is a significant reduction from the maximum 60% that is available through pensions. It is clear that the Government will have to reduce the cost of pension tax relief to the Exchequer, especially if they were to remove the ‘lifetime allowance’, but a fair method would be to introduce 30% across the board. Not only would this make savings against those who benefit the most, but it should also assist lower earners in building up a retirement pot. Ultimately, statistics suggest this would be a net receipt for HMRC while still being highly tax-advantageous to higher taxpayers – comparable with tax-efficient investment vehicles such as Venture Capital Trusts and the Enterprise Investment Scheme. It would also potentially address one of the huge ticking time bombs facing the country; an ageing population grossly underfunded for its eventual retirement.”

3. Introduce pension flexibility for defined benefit scheme members

“There is no doubt that the introduction of the new pension freedoms legislation, in terms of increasing the flexibility of pension income and death benefits, has made pension saving arguably more attractive than ever for members of defined contribution schemes. The same cannot be said for those in defined benefit schemes, however, where there is no scope for flexibility in income and the death benefits are restrictive – especially if that person does not have a spouse to survive them. We would like to see an introduction of some flexibility to these schemes, with one option being to permit the retiree to select a flexible income on an annual basis between nil and the full final salary entitlement. Any of the final salary entitlement not drawn could be placed into a separate ‘surplus’ pot from which the retiree could either draw an additional income if required in the future or, on their death, could be paid to their nominated beneficiaries (including adult children) as a lump sum. This could reduce the current surge in members of defined benefit schemes seeking to transfer into defined contribution schemes as they seek to take advantage of the improved death benefit position.”

4. A lifetime pension fund

“The introduction of workplace pension schemes has been a positive step in encouraging people to commence saving for their eventual retirement. However, we believe that more could be done to encourage employees to not opt-out of these schemes, especially for those who have already been funding a pension plan personally. The current structure puts far too much emphasis on the employer to select a ‘qualifying’ scheme and, based upon caps on charges amongst other factors, these schemes are typically not very flexible and offer a very limited fund range (typically a lifestyle strategy). Furthermore, if the government’s own NEST pension is selected the contributions are subject to initial charges, which is hardly an incentive to those that have never saved for a pension before. NEST’s lack of flexibility, both during the accumulation phase and retirement phase, means savers can’t take full advantage of pension freedoms. Whilst changes have been mooted, we believe they need to happen immediately.”

5.Transferable annual allowances

“Under current pension legislation an individual can receive tax relief on pension contributions that represent either 100% of their salary or the ‘annual allowance’ of £40,000, whichever is the lower. If HMRC were to introduce the flat rate tax relief of 30%, then we would also welcome the introduction of the potential to share the ‘annual allowance’ between spouses. It is not unusual for one spouse to be a higher rate taxpayer with the other spouse receiving little or no income (i.e. if they are a stay-at-home parent), and in this instance the spouse with no income would be restricted to pension funding of £3,600 (gross) per-annum. However, we believe that these individuals should have the flexibility to apportion the ‘annual allowance’ of £40,000 between them, and this would enable the higher rate taxpayer the option to either contribute £40,000 (gross) into their own pension fund, or £20,000 (gross) into a pension for each spouse. This would be a tax-neutral position for HMRC as they would incur 30% tax relief on £40,000 regardless, but would reduce the potential for one spouse only to have a pension fund in retirement.”

6.Retain pensions or boost tax relief to LISA

“The lifespan of pensions has become quite ominous with the introduction of the Lifetime ISA (LISA). Pensions are much more than just a savings vehicle, as they have to take into account a range of complexities such as inheritance tax mitigation, commercial property investment, family investments, company shares and more. Either pensions should run alongside LISAs, or LISA tax relief needs to be increased, with investment flexibility greatly expanded.”

To discuss this or any other financial planning topic please contact Gary Smith on 0191 269 9971/

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