25th April 2016 by Steve Herbert
March 2016 was a roller coaster month for the world of UK pensions.
At the start of the month the industry, employers, and savers were braced for predicted alterations to the current system of tax reliefs. Such changes were shelved only a matter of days later (seemingly in response to the EU referendum), but a competitor to pensions in the form of the Lifetime ISA (LISA) was later revealed by the Chancellor in his Budget statement.
A few weeks have now passed for all interested parties to absorb the impact of these announcements. Yet the question of what should next happen with regard to pension tax relief remains.
Politically it is difficult to call. A win for the “remain” vote is unlikely to result in any short-term major changes to key Ministerial posts. This in turn would mean that George Osborne would be able to look at this issue again without concerns about the referendum clouding the issue.
A win for the “leave” campaign is likely to result in a leadership change, and it would be difficult to see Osborne remaining in his current job under such circumstances. Yet any new Chancellor would face similar fiscal challenges.
In either scenario the option of attacking anew the current system of pension tax reliefs would be a temptation that may prove too much for the appointed Chancellor. So change could still be close at hand.
So what would pension tax relief look like should such a move take place?
The answer may perhaps be found in two government-supported options that become available in April next year. Tax Free Childcare (TFC) and the Lifetime ISA use similar mechanisms to encourage saving. Both benefit from a state contribution equivalent to basic rate tax relief, and both are limited to a maximum support level from the Treasury.
It follows that these options represent a known and controlled cost to the government, and equally will avoid any accusations of discrimination by favouring those who pay higher taxes. And each will benefit from more simplistic communications and promotion than their currently available alternatives allow.
There is also an interesting divergence from tradition in the language being used to promote the LISA concept. The government seem to have embraced sales-speak, referring to a 25% “bonus” contribution rather than 20% tax relief. This is a step in the right direction for user engagement and understanding, and should genuinely be welcomed by all.
It is clear that the government has established a direction of travel with regard to tax incentives, and it would therefore be rather unlikely for the Chancellor (whoever that may be) to announce any solution to the pension tax relief conundrum which differs significantly from this approach. I’m sure there will be plenty more ups and downs in this journey yet, but a more simplistic approach to pension tax relief now seems more likely than not.
Steve Herbert is Head of Benefits Strategy at Jelf Employee Benefits