STRENGTHENING THE INCENTIVE TO SAVE: A CONSULTATION ON PENSIONS TAX RELIEF

Transcription

1 STRENGTHENING THE INCENTIVE TO SAVE: A CONSULTATION ON PENSIONS TAX RELIEF Response by the Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to respond to the consultation document Strengthening the incentive to save: a consultation on pensions tax relief ( the Consultation ) published H M Treasury (HMT) on 8 July We will respond to the detailed consultations questions at section 3 of this response, but we would first like to start with some comments and observations on the Consultation document itself. 2 Comments on the Consultation document 2.1 The paper produced by HMT appears to be biased towards larger organisations and seems to completely ignore the self-employed who now form a major sector of the UK economy. 2.2 In our opinion, the comments made at paragraphs 1.3 and of the Consultation are out of date as defined benefit schemes have been too expensive for most SME businesses since the 1970s and have never been available to the self-employed. 2.3 The Consultation makes the point, at paragraph 1.10, that individuals are now living and working for longer with the assumption being that individuals therefore now have the capacity to save more during their longer working life. We would actually challenge this assumption. If you look at a person s expectation of a working life back in the 1950s they would generally start work at 15 years of age and retire at 65 years of age, equating to a working life of 50 years. Today, education generally lasts until at least 18 years of age (and higher for university students). Coupled with an increased retirement age of 68, this still allows for a working life of 50 years. On the whole, people today have just the same amount of time to save towards retirement as they did back in the 1950s. Registered in England and Wales Registered Office: 1st Floor, Artillery House, Artillery Row, London SW1P 1RT A company limited by guarantee: Number Registered as a charity: Number VAT Registration: Number

2 2.4 There seems to us to be a number of contradictions made in the Consultation. For example, paragraph 2.6 states that: Over two thirds of pensions tax relief currently goes to higher and additional rate taxpayers This statement does not seem to be consistent with the statement at paragraph 2.5 that the rising cost of pension s tax relief is notably due to employer contributions. One of the reasons that most relief might go to wealthy taxpayers is that they are the only ones who can afford to make large contributions something we will discuss in more detail at section 3.1 below. We also suspect that few claimants of Tax Credits correctly claim for pension contributions and the education around this needs to be improved. 3 Our responses to the questions 3.1 Question 1: To what extent does the complexity of the current system undermine the incentive for individuals to save into a pension? We do not believe that the issue of complexity is the reason individuals are not motivated to save into a pension. We believe there are more relevant factors: In recent years there have been so many changes to the pensions system that people have lost confidence. It has created a lot of uncertainty and does cause people to question whether the pension rules could change after they ve put their money into them. People are worried they won t get their promised tax-free lump sum. All of the recent changes are putting people off Affordability is also a big factor for the group that the Government are trying to capture basic rate earners aged between years. This group of people often have other commitments on their income such as student loan repayments, getting on the housing market, or starting a family. If the choice for someone is between food, a roof, Iight and heat or a pension, then clearly a sensible person will choose to live now and worry about the future in due course. We think it will be very hard for the Government to overcome these issues and find any way of motivating this group of people to save more. Automatic Enrolment does help here but only to a very limited extent. If someone does not have the money to spare, they just aren t in a position to save As well as looking at the incentive for individuals to save, we must also consider the incentive for financial advisers and brokers to sell pensions to the mass market. This incentive has been seriously eroded ever since the changes in 2013 which prohibited advisers from being remunerated from group money purchase schemes and made it impossible to advise the mass market on pensions unless they were prepared to pay professional fees. As many individuals were not willing to pay this, advisers began to focus on providing their services where they could be sufficiently rewarded for their time, effort and expertise, resulting in excluding a large part of P/ATTTSG/Submissions/2015 2

3 society from pension saving. The Government needs to understand the impact that recent regulatory changes have had on the willingness of advisers to sell pensions to the wider public The time when, perhaps, the greatest take-up of pensions occurred was back in the late 1980s when the Government carried out a prolonged period of advertisement on TV, radio and in newspapers that lasted for about 3 years. In recent years there has been mainly only negative press coverage of pensions that has left many people with a poor perception of pensions. The Government needs to find a way to reverse this perception. 3.2 Question 2: Do respondents believe that a simpler system is likely to result in greater engagement with pension saving? If so, how could the system be simplified to strengthen the incentive for individuals to save into a pension? Our comments at also apply in response to question We would add that greater engagement is not always achieved by making something simpler. In this case in particular it will be more important to achieve a prolonged period of consistency in the pension system and to try to avoid the constant changing of the rules that has been occurring under successive Governments. An agreement by all parties to work towards a sustainable pensions system that will remain unchanged for a significant period of time could help greatly to achieve incentivising people to become more engaged with pensions However, we would note that some financial advisers are backing away from providing pensions advice due to the added complexity and the fear of getting something wrong and being held accountable for it. Those that are willing to offer advice are usually only doing so where it is cost effective for them (as already outlined at section 3.1.3) and so advising higher earners who are making larger contributions. If the regulatory environment were to change this would encourage advisers to promote and sell more pensions. 3.3 Question 3: Would an alternative system allow individuals to take greater personal responsibility for saving an adequate amount for retirement, particularly in the context of the shift to defined contributions pensions? As we have noted at section 2.2, the shift to defined contributions schemes started back in the 1970s so this is not a recent shift and the comments in this Consultation appear to be somewhat out of date. Indeed, there are hardly any defined contribution schemes, if any at all, that remain open to new members in the private sector. This is completely the opposite in the public sector and does create a growing disparity between the two sectors. At present the law prevents some public sector organisations, such as education establishments, from doing what many businesses in the private sector have had to do to reduce costs and that is close membership to the defined benefit scheme to new members and offer them a defined contribution scheme instead. Unless the law changes in this area, it will be very difficult to achieve a level playing field. P/ATTTSG/Submissions/2015 3

4 3.3.2 We do not see what alternative system could encourage individuals to take greater personal responsibility. It would be just as worthwhile for the Government to find better ways to educate people on the current system and perhaps consider a publicity campaign in the same vein as the one carried out back in the 1980s (as mentioned at section 3.1.4) However, some people will always have a short-term focused attitude. Such people would need to be making different lifestyle choices now (such as not going into higher education and taking out a student loan; not buying such an expensive house; not having a second or third child) so as to afford pension savings. Some people are just not willing to sacrifice their lifestyle and life choices now for a potential future retirement. 3.4 Question 4: Would an alternative system allow individuals to plan better for how they use their savings in retirement? Our comments at sections also apply in response to this question We would also add that recent changes to the pensions system have not yet had time to bed in so we haven t had chance to see the effect yet Many people have now turned their back on pensions and see property investment as their pension pot instead. As a way of reversing the perception of pensions, as mentioned in section 3.1.4, the Government might want to consider allowing residential property to be a permissible pension fund asset and this might prove to be a way of drawing people back into pension savings. 3.5 Question 5: Should the Government consider differential treatment for defined benefit and defined contribution pensions? If so, how should each be treated? No, there should not be differential treatment for defined benefit and defined contribution pensions. If there is not an equilibrium the danger is that this difference could be exploited by parts of the tax planning industry. This in turn could lead to more anti-avoidance measures and further change to the pensions system which would not be conducive to creating a sustainable and stable system aimed at restoring public confidence in the pensions system. 3.6 Question 6: What administration barriers exist to reforming the system of pension s tax, particularly in the context of automatic enrolment? How could these best be overcome? Automatic enrolment as a system is quite straightforward to understand and operate, with the exception of the regulatory burdens that accompany the scheme. We understand that some advisors have tried to avoid getting involved with Automatic Enrolment cases due to the fact that the rules kept changing up until quite recently. This made it very difficult to advise clients on the scheme. Stability in this area is also recommended in order to allow employers and advisers P/ATTTSG/Submissions/2015 4

5 the time to properly get to grips with the rules. This is particularly important as the full impact of Automatic Enrolment is yet to be felt by all UK employers The requirements of Automatic Enrolment also seem excessive when applied to very small firms. Many small employers just don t find it possible to read and digest all of the information that comes with the opening of a scheme. The costs of running millions of schemes with no or very low contributions will, in due course, impact upon the effectiveness of the scheme Finally, another major barrier that we would mention that is not to do with Automatic Enrolment is all of the different rules that affect historic pensions. Any reform ought to sensibly address all of these different rules. 3.7 Question 7: How should employer pension contributions be treated under any reform of pension tax relief? We believe that this is a balancing act and are not sure we can provide a definitive answer. We can envisage that treating employer contributions more favourably than an employee contribution could lead to planning that may be seen as unacceptable to the Government and HMT However, it is also important that we keep employers engaged with pension savings, especially as there may already be an issue in that employers will themselves generally be higher earners and might be becoming more disengaged (on a personal level) as their own personal pension savings are restricted. It would also be a major disincentive for employers who pay Corporation or Income Tax to have to pay pension contributions out of taxed income, and a significant increase in the effective costs to a business of providing a pension scheme A related point to consider is that, under the current system, individuals are taxed on their employer s contributions if they exceed the annual allowance. The current concern is that more and more people will fall into this charge with the restriction in the annual allowance for higher earners. Unless this is addressed or reformed in some way, we are concerned that it could lead to significant disengagement with pensions. 3.8 Question 8: How can the Government make sure that any reform of pension s tax relief is sustainable for the future? We do not think that a change to a Tax-Exempt-Exempt system would be sustainable. Initially, it might help to boost the Exchequer with tax on contributions but in the longer-term there would be many pensioners drawing tax-free pensions and not contributing anything to the tax system. We believe a change to this kind of system would only be storing up problems for the future. A Tax-Exempt-Exempt system would be difficult to administer for a defined benefit scheme. For instance, how would employer contributions be valued for each member and how would deficit funding be treated? In addition, we don t see how taxing contributions up front is going to encourage people to save more, especially given the affordability issues discussed at P/ATTTSG/Submissions/2015 5

6 3.8.2 The key factor, as we see it, in making pensions sustainable for the future is restoring public confidence and this can only really be done, as already highlighted at section 3.2.1, with a long period of stability. 4 Other considerations Here we add a few further points for consideration. 4.1 If pension savings become unattractive to the higher earners, they will simply switch to other tax incentive schemes. Therefore, there does need to be some joined up thinking between all tax incentive schemes (ie EIS,VCT,ISAs) to ensure that there is a common policy intention. 4.2 We would like to note the issue with the current requirements for advisors to produce and explain pension illustrations. These documents can be very lengthy and extremely off-putting to potential savers. If the regulatory framework, administration and paperwork associated with pensions were to be reviewed then there may be no requirement to change the actual system itself. The actual paperwork presented to savers may be causing a very high level of disengagement and, therefore, a disincentive to save. 4.3 There are still many employees in defined contribution schemes who are not aware that they are entitled to claim higher rate tax relief. As tax advisors, we deal with lots of cases where employees come to us for general tax advice and we are able to reclaim multiple years worth of higher rate tax relief on pension contributions. There must, therefore, be many more cases where that relief goes unclaimed. Again, as a way to improve the perception of pensions, it might be a good idea for the Government to run a campaign to highlight and remind higher rate taxpayers of this benefit to pensions. 5 Summary 5.1 We have provided our comments and responses to the Consultation questions and hope that these are of use to HMT. To summarise, the current system has been discredited and undermined by the constant changing of the rules that has occurred over a number of years by successive Governments. This has destroyed public confidence in the system and goes a long way to explaining why individuals might not be motivated to save towards a pension. However, other commitments on people s personal finances do have to be taken into account. For example, the significant increase in student loan repayments over recent years means that an individual is likely to be much further into their working life before they can adequately afford P/ATTTSG/Submissions/2015 6

7 to make pension contributions probably only once they have finished paying off their student loans. A brief review of pension systems operated by other countries has shown us that there is no one ideal scheme that will address all the issues that exist. However, it might be that the UK can learn from the examples in Denmark, Australia and the Netherlands who have all scored highly when it comes to adequacy, sustainability and integrity of their pensions system. Whatever system is chosen will need to be a compromise to be acceptable to Government, providers and taxpayers. 5.2 Contact details: Should you wish to discuss any aspect of these comments, please contact our relevant Technical Officer, Alison Ward, on or at award@att.org.uk Yours sincerely Paul Hill Chairman, ATT Technical Steering Group 6 Note The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible. Our members are qualified by examination and practical experience. They commit to the highest standards of professional conduct and ensure that their tax knowledge is constantly kept up to date. Members may be found in private practice, commerce and industry, government and academia. The Association has over 7,700 members and Fellows together with over 5,600 students. Members and Fellows use the practising title of 'Taxation Technician' or Taxation Technician (Fellow) and the designatory letters 'ATT' and 'ATT (Fellow)' respectively. P/ATTTSG/Submissions/2015 7