Neil MacGillivray: I fear more seismic changes

In the lead up to the Spring budget there was a fair amount of speculation about what major (negative) changes were going to be made to pensions. It therefore came as a relief when nothing new of any consequence was announced. The opportunity for advisers and providers to consolidate and bed down the seismic changes that have happened in the pension landscape over the last few years was welcome. However, now is not the time to get complacent as I fear further seismic changes will occur. Why do I say that? Let’s take a look at some numbers.Much is made of the UK deficit, currently forecast as being £76bn at the end of the last financial year. The deficit is the amount of public sector borrowing in excess of the revenue received in that fiscal year. It is perhaps the most common number cited by the press or news and it is what the Chancellor is trying to bring under ‘control’. While there is no denying it is a ‘big’ number it is dwarfed by the figure for the UK’s debt as a whole, which seems to feature less on the Chancellor’s radar. Obfuscation is the name of the game when it comes to this number. In a recent government publication the public sector net debt for 2013/14 was given as approximately £1.46 trillion, or 81% of GDP. However, in other figures provided by the Office for National Statistics the public sector gross liabilities for the same year were £3.19 trillion; £0.79 trillion was for other liabilities, £1.096 trillion for government borrowing and £1.3 trillion approximately for the public sector pension liability. In respect of the latter figure, £1.206 trillion of the liability was for unfunded schemes; in other words there is no investment fund behind to support the liability, and therefore the taxpayer ultimately ‘carries the can’ for these schemes.In my opinion this cannot continue and something dramatic has to be done to deal with these two aspects. The Chancellor is, however, constrained in what he can do. It would be political suicide to increase the headline rate for income tax and therefore he has to look at other indirect ways of increasing revenue. One such method we have seen is the divergence between the personal allowance and the threshold for paying higher rate tax (HRT). In 2010/11, 9.65% of tax payers paid higher rate tax, in 2015/16 it is estimated 15.66% paid HRT. Another has been the reduction in stages of the lifetime allowance from £1.8 million to £1.0 million, the last reduction is expected to net the Treasury at least £1.86 billion over the next four years.In last year’s consultation (Strengthening the incentive to save: HM Treasury 2015) it was intimated that in excess of two thirds of pension tax relief goes to higher and additional rate taxpayers. As a headline statement it certainly grabs your attention and seems to further underline the inequality between the haves and have-nots. However on further inspection of figures provided by the Treasury and the ONS, it seems to me to be somewhat less clear cut. The Treasury imply that the “gross cost” in tax relief and National Insurance Contributions (NIC) lost to pension savings was close to £50 billion in 2013/14. Breaking down this number though shows that NI accounted for £14 billion of this figure and tax relief for employers for occupational schemes a further £17.1 billion, or around 60% of the “cost”. The actual tax relief for employee contributions into personal pensions, which includes Sipps, was only £1.9 billion, with a further £3.1 billion in employer tax relief into personal pensions, or approximately 10% of the “cost”. In the simple world I inhabit I find it difficult to formulate how £1.9 billion equates to 66% of £50 billion ‘tax relief’.That being said, tax relief for higher rate and additional rate taxpayers is a low hanging fruit and it serves the adage that “we are all in this together” if full relief is removed and a more equitable approach is adopted. I believe within the next year we will see a further erosion of tax relief available for pension savings and ultimately a move to a taxed, exempt, exempt world. The Treasury’s need to increase the tax take now, rather than having it deferred till people take their pension which necessitates the need for change. The problem though is can we trust a Chancellor in twenty or thirty years time not to continue to tinker with pension tax legislation? I personally doubt it.

Neil MacGillivray: I fear more seismic changes

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