UK - Proposals to reduce tax relief for high earners could be the "thin end of the wedge" leading to later changes affecting lower income workers' pension arrangements, members of the House of Lords have been told.
In an evidence session to the House of Lords Economic Affairs Sub-Committee on the Finance Bill, representatives from the National Association of Pension Funds (NAPF) and the Association of British Insures (ABI) claimed the Budget proposal had "jeopardised" the simplicity and stability of earlier pension reforms.
Joanne Segars, chief executive of the NAPF, told the committee the changes proposed in the Pensions Act 2004 and implemented on 'A-Day' - 6 April 2006 - had been "working well" following a long consultation process and cooperation between pension schemes, employers, insurers and the government.
However, she warned "our concern is that now this has been significantly disrupted" by the plans to reduce tax relief for those earning over £150,000 from 40% to 20% from 2011. (See earlier IPE articles: UK Budget cuts higher rate tax relief and Tax relief cut may 'destabilise' pensions)
She argued the reason the industry had put so much effort into the simplification process was because"'we thought it would be there, not in perpetuity as nothing is in perpetuity in pensions, but certainly for longer than three years".
Maggie Craig, director of life and savings at the ABI, added that "if things get to a stable point and then change, it undermines confidence," as the proposals "provide a backdrop of change and the feeling is are we now going to get another change in a few years, then another and another. This could be the thin end of the wedge".
Segars said "simplicity is absolutely essential and clarity is absolutely essential" in pensions, but claimed the recent changes mean employees and providers "can't have that certainty", particularly as there is still some confusion over the details of the anti-forestalling measures.
The measures were designed to stop people taking advantage of the gap between the Budget announcement and the introduction of the tapered reduction in tax relief, but both Segars and Craig told MPs it is not clear what constitutes a "normal pattern of contribution".
There are concerns, as a result, that people in ill-health or redundancy who want to make a "last push for retirement" before they leave work could be caught by the measure, while other issues could involve workers investing half an annual bonus in a pension, but as the bonus goes up and down so do the contributions, and this may or may not be considered a 'pattern'.
Craig suggested "there are some wrinkles in this that need to be ironed out", while Segars agreed the definition of normal contributions is "far too rigid", and said the issue needs to be looked at "urgently".
The two industry bodies also highlighted the belief that the proposals will break the previously established tax principle of Exempt, Exempt, Tax (EET) on pension saving, through the introduction of tax on employer contributions and the possibility of double taxation if people are high-earners, as they would get tax relief of 20% but would likely be taxed on the retirement income at 40%.
Craig warned: "Our concern is the overall message it sends. Once you've broken the principle it's crossed a watershed. Having started with the higher-earners, it could move down the lower-income brackets. There is a fear of setting a precedent and also the perception that it is no longer a good idea to save in pensions."
Segars echoed the point in her evidence, as she claimed there had been "previous form on this" in the pensions area, including the reduction and eventual abolition of Advanced Corporation Tax (ACT) and the increase in the people caught by the annual allowance.
She warned: "There is a creeping of the coverage of what is meant to be targeted measures that have now become the norm."
Meanwhile, in response to a question from one of the peers, asking whether the changes could lead to mis-selling, Craig said: "Put it this way, it is very difficult to advise someone if you don't have a proper handle on what you're dealing with. So yes."
She said previously entering a company pension scheme was a "no-brainer", but that would no longer be the case, and for a self-employed worker that doesn't know what their earnings will be, the adviser cannot work out the tax implications, so "it is incredibly difficult to advise on this".
Despite arguing that the government could have informally 'pre-consulted' on the proposed changes with a few stakeholders, the NAPF revealed HM Treasury "are now going to start a formal consultation, we understand, with representatives from the industry including the ABI and NPRF".
But Segars added: "The government needs to be absolutely certain there are no unintended consequences, such as the undermining of pensions, from these changes. And we're not fully convinced the government has really taken that risk on board."
Have Your Say:
Edward Nugee QC, of Wilberforce Chambers, London, said: "The one point that is not clearly made, I think, is that if contributions to a pension are going to be taxed, albeit at present only at the higher rate, and pensions are themselves going to be taxed when they come out (i.e. no longer EET but TET), would not well-advised higher earning employees say:
'Pensions are deferred pay, part of my total remuneration for the current year's work. If my pay is going to be taxed twice - once when it goes into a pension fund and again when it comes out - may I please have the whole of my total remuneration for the current year's work, in the year in which I earn it as regards my future service, and forego any further accrual to my pension'."
"Is this what the Government wants? Maggie Craig is right. Once you have broken the EET principle (and the tax system does have some principles and logic in it), there is no knowing where it will stop, and the giving of advice becomes impossible."
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