Pension Theft

With the first Labour budget a little over a month away we can now begin to see the public relations playbook hasn’t changed much with the new administration. Why would it? Much of the Socialist Civil Service remains in place. Ideas are leaked to assess the likely response of the middle class. The “painful” budget that Rachel Thieves Reeves is likely to deliver will undoubtedly affect the attractiveness of pensions as a tax efficient savings vehicle, both now and into the future.

Luxury Beliefs

A luxury belief is an idea or opinion that confers status on members of the upper class at little cost, while inflicting costs on persons in lower classes. The term is often applied to privileged individuals who are seen as disconnected from the lived experiences of impoverished and marginalised people. – Wikipedia

Ms Reeves was born in 1979, which means she is at least 12 years away from being able to access the sort of pension savings we all hold, even if she had some herself. This Labour administration is about to plunder a rich seam of savings that won’t affect them. Many “hard-working families” (sounding like a politician myself now) have spent decades building up this form of life savings and will rely on these savings for the rest of their lives. With a quick scan of Wikipedia I can also deduce that she can afford to make sweeping changes to defined-contribution pensions (the type we have) because she is unlikely to have anything but defined-benefit pensions herself. Neither is her Civil Service husband likely to be affected.

Sir Keir Starmer has also faced criticism for benefiting from a special pension scheme during his time as Director of Public Prosecutions (DPP) from 2008 to 2013. His pension is “tax-unregistered,” meaning that it is not subject to the Lifetime Allowance (LTA) cap, which normally limits the amount one can save in a pension without facing additional tax charges. This scheme was introduced by the government and mirrors arrangements available to judges, intended to prevent an exodus of senior public figures from the judiciary.

One rule for us, one rule for the elite. Luxury beliefs.

The credible pension leaks so far

Removal/Reduction of Tax Free Cash

Spoiler Alert – There is no such thing as tax-free cash in pension legislation. With the introduction of Pension Simplification which arrived on “A-Day” 6th April 2006, a swipe of the pen sent “pension tax-free cash” in to history and replaced it with “pension commencement lump sum” (PCLS). Because the terminology changed 18 years ago, it was always likely that changes could be made in the future if required by over-spending governments.

Currently PCLS carries a tax rate of 0% and is capped at £268,275 which is 25% of the current lifetime allowance. If you are keeping up you will remember “Two Tier Kier” has a pension that is not challenged by any changes in the lifetime allowance.

Changes for the rest of us are now likely to be introduced;

• The cap of £268,275 could be reduced. The current rumour mill suggests the cap could be dropped to just £100,000, which would increase the future tax bill for any pension saver with a pension account currently over £400,000.
• Other suggestions are it could be capped at £zero or the current rate of tax of 0% could be increased to anything up to 20%. Both of these suggestions are extreme but possible.

Currently any client who will have passed their 55th birthday by the 30th October (budget day), with pension savings still intact, where there is still some potential PCLS to be taken, should consider their options. We are available to consider your overall position and make our recommendations.

Defined Contribution Pensions become subject to Inheritance Tax

Not benefitting from a secure index-linked defined benefit pension, leaves the rest of us with a few dilemmas.

• With 15 year annuity rates so low, even with the current spike in short term interest rates, most individuals choose to keep their pension accounts invested, opting for drawdown instead. Typically an individual purchasing an annuity would need to survive for decades to see just a return of their initial pension savings.
• The alternative is pension drawdown, which if prudently managed, should comfortably beat the return on the annuity. But there are no promises.
• To ensure we don’t run out of pension savings over an un-certain lifespan, withdrawals need to remain on the prudent side. This typically means we will run out of life before we run out of pension savings.
• This residual pension can currently be passed to our children free from Inheritance Tax.

Of course Labour have never liked this and would like to tax this residual amount. The problem faced by successive Labour administrations is that most pension schemes are in effect trusts. To attack the IHT free status of pensions would require a change to the taxation of discretionary trusts.

The rumour mill suggests there could be changes made here, but this would require much more than the swipe of a pen. Changes could be made over the term of this Government, but I don’t expect it is possible to make those sorts of changes by the end of October.

There is not much savers can do to defend themselves here other than increase withdrawals subject to only 20% tax (total income below £50,000) to try to avoid 40% IHT upon death. This is a longer term strategy that we will suggest to applicable clients during our regular reviews.

Limit Pension Tax Relief on future contributions.

Several Socialist/Marxist Government sponsored Quangos have suggested that tax relief on pensions should be limited. This has already been achieved by introducing the “Annual Allowance”. It proved disastrous for holders of higher positions in public sector defined benefit pension schemes, such as hospital consultants. The initial cap of pension contributions of no more than £40,000 a year had to be increased to £60,000 a year pretty sharpish in order to ensure we still had a barely fully functioning NHS.

The Quangos suggestion is everyone who saves into pension is given the carrot of 30% -33% tax relief on their pension contributions. Evidently this would enhance the savings of 90% of pension savers. This measure does indeed help basic rate tax-payers and so is likely to happen. A vote winner if ever there was one. But remember “What the Lord giveth, the Lord taketh away”.

Pension tax relief is a misnomer. The tax treatment of pension savings would better be termed “tax deferral”. At some point we all want to enjoy spending our life savings. Currently 75% of our savings are subject to income tax at an unknown prevailing rate when we retire up to 40 years later. Who knows whether the basic rate of income tax will remain at 20% then? What if our savings do so well we become higher rate tax-payers in retirement. In this case we were given 30% – 33% uplift initially to finally have 40% taken from us in the future.

And what about those individuals who currently benefit from 40% tax relief today, only to see it reduce to in the future? I’m sure they will lose their sensible pension savings faith immediately. Hence 90% of pension savers will benefit, many 40% tax-payers will cease making contributions immediately, which kind of shows the fudge in their cost benefit analysis.

I would suggest clients who are considering making large pension contributions towards the end of the tax year to perhaps consider investing before 30th October to ensure they receive this years “tax relief” of 40%.

And Finally Esther

55+ year olds will remember the end kicker of That’s Life. The kicker here is that money flows. If tax concessions are taken from one area they will seek others. Expect to see changes brought in concurrently to limit ISA contributions and increase the rates of Capital Gains Tax to investments outside of ISAs. The subject for next time.

Finally, finally

None of the above constitutes financial advice. We only make personal regulated recommendations directly to individual clients.