06 February 2023
If you are covering the IFS report ‘A blueprint for a better tax treatment of pensions’, please find below a comment from Jon Greer, head of retirement policy at Quilter:
"On the surface of it, the proposals in the IFS report on pension taxation, out this morning, will almost certainly elicit some consternation from the industry and public. But regardless of whether people agree or disagree with the proposals they certainly take pension taxation in a different direction and this should be welcomed.
"One good thing set out in the report is the idea of consigning flat rate relief to the ‘ideas bin’. There are mighty fine reasons for that, as flat rate relief is a big headache for net pay arrangements to implement as well as for HMRC and there are issues with salary sacrifice being used as an easy mechanism to avoid its effect. There is also the not so small issue of defined benefit pension schemes where the deficit contribution treatment under flat rate relief just felt too hard a nut to crack. This is all before you deal with the thorny issue of ongoing defined benefit accrual.
"The paper also discusses restricting tax-free cash (TFC). The current system of EET (exempt exempt taxed) is merely tax deferral with the exception of tax-free cash. This is arguably ‘the’ tax break on pensions. Restricting TFC is perhaps a simpler proposal as you don’t get into tricky areas of double taxation. However, the thought of restricting TFC will not be looked upon with the cold light of logic. It is emotive and always has been. Not a budget nears without at least rumours of TFC restrictions surfacing and that’s been the case every year since I joined the industry in 1998.
"But looking at the reality of it, you’d only save significant tax revenue if the change was applied to existing pension savings and that runs against the usual transitional protection that the Treasury usually apply. If government applied it retrospectively there would be such a backlash that the Conservatives would unlikely be re-elected for some time. You could even go as far to suggest that the government might be subject to claims of human rights infringements. People would likely feel that an unwritten pact had been broken and it could seriously damage the reputation of pensions.
"If you did tax some element of the lump sum going forward it is presumably the case that this could, for some people, put a basic rate taxpayer in retirement into higher rate tax. PAYE tax on flexible withdrawals especially lump sums is already a difficult area for customers to comprehend.
"Some of the proposals may have significant challenges in their actual administration. For example, there is a proposal to make all pension withdrawals subject to tax and then get a refund from HMRC to get your ‘tax relief’ on the lump sum. Whilst this is an option it would add to the already significant pension reclaim tax figures that leave people regularly out of pocket when lump sums get taxed at the emergency rate. Last year alone, £134m was repaid to savers in 2022 in overcharged tax. This works out at an average of £3,215 per claim made. Implementing this proposal might increase HMRCs administration significantly and presumably require it to police the maximum TFC regime to some degree.
"Finally, the proposal to subject pension income to NICs has some interesting aspects, the transition to it could take some time otherwise you’ll have a degree of double NICs.
"Ultimately changing the current regime isn’t easy because there is no silver bullet to fix all the problems but radical ideas are never easy to stomach and while many of the proposals may have some tricky practical application and perhaps some unintended consequences we need to have these conversations as they move the debate forward on an issue that will have a profound impact on the fortunes of the generations to come."
