George bides his time on TEE

Alan Collins

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Those waiting for news of further seismic changes to the UK pension scene were made to wait yesterday when the Autumn Statement confirmed that the Government’s response to the pension tax relief consultation will be published in the 2016 Budget.  Given the continued polarisation of views on the matter, and the impact that the changes could have, it is perhaps not surprising that the Government has paused, albeit briefly, for further reflection.

All options are therefore still on the table.

Retaining the status quo of marginal rate tax relief up front with tax paid on (most) retirement income has the appeal of consistency and keeping higher earners “interested” in pensions. It does though have the problem that it is not well understood or appreciated by lots of those who benefit from it.

The “middle way” of flat rate tax relief (perhaps 25-30%) has many supporters as it would give greater consistency with the current system while having the appeal of redistributing more of the relief to lower earners.

Supporters of a more radical approach such as a switch to a Taxed Exempt Exempt (TEE) system, where contributions are taxed but returns and later income is not (similar to ISAs), have been growing in confidence of late.  They believe that upfront tax relief is “wasted” and that a merging of pensions and ISAs into a single savings framework is the way to go.

In other pension matters:

  • The power of the triple lock is now clearer than ever with state pensions increasing at 2.5% even though (consumer price) inflation is effectively zero.  Other pensions (other state pensions, private sector pensions and pensions in government/local government schemes) will not feel the same glow and will in most cases not increase at all next year.  Can you imagine the government increasing state pensions by 7.5% if inflation was 5% – no?  Neither can I.
  • There will be some simplification of the step up in auto-enrolment minimum contributions.  Instead of occurring in the month of October, the step ups will be deferred to the following April to align with the tax year (and the new uniform pension input period)
  • The push for consolidation of Local Government Pension Scheme assets is to continue.  The Government is seeking to establish up to six British Wealth Funds that will contain at least £25 billion each in assets, with a primary aim of supporting large infrastructure projects (similar to the approach by taken by other global pension funds such as the Ontario Teachers’ Pension Plan).  To move things forward, the Government is inviting administering authorities to submit proposal for how assets will be pooled.
  • Last but not least, something I thought would find its place in the long grass (beside Defined Ambition/Collective Defined Contribution schemes and “pot follows member”) is actually being moved forward, in principle at least.  The government is to “remove barriers” to creating a secondary market in annuities.  The biggest barriers i.e. that it won’t solve the problem of previous poor value annuities and that it will never work in practice will probably still get in the way…
Alan Collins

Post by Alan Collins

Head of Trustee Advisory Services at Spence he provides actuarial, funding and investment advice to trustees and sponsors of ongoing defined benefit schemes.

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