6th April 2017 by Steve Herbert
Last month’s very public government U-turn on the decision to increase National Insurance contributions for the self-employed was largely delivered because of pressure from the Tory back-benches rather than HM’s Official Opposition. This only serves to underline how precarious the Government’s current position is. For at least the next two years the Administration must seek to balance domestic policy decisions with the need to keep their parliamentary party on-message re the Brexit negotiations.
This unusual impasse will have ramifications for many other potentially controversial decisions, and one such key area is that of the existing pension tax relief system in the UK.
Now the current offering of incentives was designed decades ago to encourage retirement savings amongst the working population with a system of very generous tax-reliefs. In particular it aimed to encourage and reward the “captains of industry” to personally engage with pension savings, in the hope and expectation that this would lead these same individuals to offer workplace pensions to their employees. To a large degree this worked, yet it has been rather overtaken by events given that auto-enrolment legislation dictates company supported pension membership for most employees.
So what to do about pension tax reliefs? The debate has raged for more than a decade, and yet the system survived first the worldwide financial collapse, then the introduction of auto-enrolment and pension freedoms, and even an intense period of pressure before the departure of George Osborne from the Treasury. In particular the formal consultation last year appeared to spell the end for higher-rate tax reliefs, yet the EU Referendum and result has provided yet another stay of execution for a policy on which judgement may well have been passed, but sentence seems to be a long time in coming.
Yet significant changes have still been made by successive governments in this space. Limitations to the amount of tax-relieved pension contributions are now a regular staple of Budget announcements, and from this week there is another state-supported retirement savings option in the form of the Lifetime ISA (LISA).
Although LISA is primarily designed to support first home purchase with a “bonus” contribution from the government of up to £1,000 per annum, it does also include a secondary aim of retirement savings. For this reason the new product includes a back-stop of penalty free access for savers from age 60 onwards.
It is undeniable that the Lifetime ISA is attractive to those seeking a toe-hold on the housing ladder, yet its appeal as a retirement savings product is perhaps more questionable. LISA savings will not benefit from a company contribution, and the government support is capped at £1,000 per annum and (effectively) limited to Basic Rate tax-relief only. It should also be noted that the contributions to a Lifetime ISA must also cease at age 50.
And, at the time of writing, providers have hardly flocked to embrace the LISA, with very few products being yet available for consumers.
For all the above reasons the Lifetime ISA is unlikely to yet present much of a challenge to pension savings. This may however change as more and more providers eventually begin to offer the new product – with a resultant increase in media-noise and consumer awareness.
Yet the real test will probably come if and when the subject of changes to pension tax-reliefs returns to the Chancellor’s Budget radar. Noises from Whitehall suggest that this may not be for some time to come, although should the economy significantly worsen before the end of the Brexit negotiations then the need to claw-back some of the costs of the current system may become paramount.
What we do know is that – at least for the moment – the current very generous system of tax reliefs and employer contributions remains available to pension savings. Those looking to save primarily for their retirement should take advantage of this whilst this situation persists.
Steve Herbert is Head of Benefits Strategy at Jelf Employee Benefits