UK pension tax proposals to cost “e1.44bn”
UK – The government’s proposals on simplifying the taxation of pensions could cost the industry as a whole up to one billion pounds (1.44 billion euros) in the short term, a consultant says.
Jardine Lloyd Thompson’s technical director June McIntosh says the one-off implementation costs of the proposals could amount to 500 million pounds, driven by the need for new computer systems, training and client communications. “It’s going to be a one-off hit,” she said.
And there would be “transitional costs”, spread over three years, of a further 500 million pounds. The move to the new system was a “multi-stage” process with a lot of work involved, McIntosh said. At least in the short term there would be no administrative saving. She said that it would be six or seven years before savings would come through.
She added that the government does not understand the costs involved.
McIntosh was responding to a consultation document issued by the Inland Revenue, the government tax office, entitled “Simplifying the Taxation of Pensions: Increasing Choice and Flexibility for All”. The government’s simplified pensions system is due to be implemented on “A-Day”, April 6, either in 2004 or 2005.
There has been a widespread reaction to the proposals. Mercer Human Resource Consulting called the proposals “radical” and said they may cut red-tape for private-sector pension schemes.
It said the proposed 200,000 pound annual limit on pension savings was an “unnecessary additional complication” which would add to the burden of administration, especially for defined benefit schemes. It said DB schemes may have to value all members’ accruals against the unlikely contingency of their having contributed at a higher level to other arrangements.
Mercer also said that the government’s suggested 1.4 million pound lifetime limit on the size of pension savings regime would hit almost 300,000 current earners, not the 5,000 estimated by the government. The 300,000 could double in 15 years if earnings growth outstrips price increases as anticipated.
The National Association of Pension Funds has broadly welcomed the proposals but urged the government to simplify the regime still further by removing the proposed lifetime limit on pension saving.
NAPF chief executive Christine Farnish said: “The numbers potentially affected are likely to be far higher than the 5,000 suggested by the Government, and compliance monitoring could prevent the benefits of simplification from being fully realised. Capping tax free cash and annual payments into pensions are all that is needed.”
Margaret Craig, manager of pensions development at Scottish Equitable, said: “The simplicity and boldness of the Inland Revenue proposals are a welcome step forward.” She said the lifetime limit would only affect a few savers.
The Association of Consulting Actuaries called for the proposed lifetime limit to be indexed in line with earnings – and that it should be at least 1.7 million pounds.