Martin Tilley: Pensions entering a 'corridor of uncertainty'

As the England cricket team play their last home test series of the summer, I am reminded of a term popularised by the former England batsman Geoffrey Boycott. In 1990, during England’s tour of the West Indies, he reflected that a ball bowled in the 'corridor of uncertainty', on, or just outside off stump gave the batsman the difficult decision to play the ball or to leave it, with a chance of being “out” if the decision proved wrong. This phrase: “corridor of uncertainty” is now often used to describe any scenario where a “twist or stick” decision could result in jeopardy. I fear this is precisely the situation many of us find ourselves in now, as pension providers, advisers and indeed as consumers who hold their own pensions. We approach an October budget, in the knowledge that “something” is brewing, and that new Chancellor Rachel Reeves reportedly has her eye on the potential tax cash cow that might be the accumulated pension funds to date, or the further accumulation of them. This uncertainty is nothing new. In the run up to every Budget in recent memory there is always press speculation that pensions will be targeted, being one of the most well-known tax efficient vehicles and a cost to the Treasury of reportedly £50billion annually. In view of the new Government, perhaps more emphasis is being given now, as the new guard might well have a different longer-term view. It follows that this uncertainty often makes for irrational decision making. As a provider, we have seen several calls for sudden payment of tax-free lump sums, where there had been no previous intention to do so. I am sure advisers will have fielded many similar enquiries from clients as to which way they should jump. Only hindsight will provide the right answer, but how likely are we to see radical change from the Budget with an immediate effect? Let us review two of the major concerns: a change to the level of tax free cash that is available from accumulated pension pots and the revision to the current level of tax relief granted on contributions: should people draw their tax free cash now, or contribute more to their pension funds ahead of the Budget? Any change to the level of tax free cash sum is unlikely to be immediate. Previous changes that have been introduced, such as the reduction in the Lifetime Allowance, have been in conjunction with transitional protections. As identified by the Office of Tax Simplification in 2010, “taxes should not be arbitrary, the taxpayer should know when and where to pay it.” A cliff edge change might otherwise run the risk of challenge of retrospective legislation and the so called “Rees Rules.” The introduction of a flat rate relief, effectively penalising higher rate taxpayers to the benefit of basic rate payers was proposed as far back as 2005 in a Pensions Commission report. Rachel Reeves has indicated her support for this, writing in the Times in 2016 she wrote: “The Chancellor should set a flat rate of relief, it would be simpler, fairer and an important step towards boosting retirement savings.” While the idea does have its merits, I must disagree that this would be simpler. The adjustments to legislation necessary to cover such a change would be enormous and certainly not something that could be accommodated in a short timescale. Net pay arrangements, salary sacrifice, and corporate contributions are just some of the complications to address. The debacle of the removal of the Lifetime Allowance and the lengthy time taken to introduce and clarify legislation should be a good reminder of that. I would hope that any proposed changes would only be after a period of consultation with industry professionals, as historically, it is only the latter who are capable of highlighting the sometimes unintended consequences of immediate high profile policy announcements. If I had to speculate on where I believe we are more likely to see change, it might be the decumulation phase and death benefits. These were both widened significantly by Jeremy Hunt when he introduced flexi access drawdown and the more favourable tax treatment for those individuals dying before attaining age 75. Payments in these instances currently enjoy exemption from both inheritance and income tax. The industry commented at the time that, “we have never had it so good “. Sadly, I don’t think we will for much longer. However, there is little, other than a rather draconian remedy, that can be done ahead of the Budget to mitigate any change here. Martin Tilley is chief operations officer at WBR Group martin.tilley@wbrgroup.co.uk

Martin Tilley: Pensions entering a 'corridor of uncertainty'

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