Is This the Future of UK Pensions?
New think tank, the Centre for Policy Studies (CPS), marks out the future for pensions. This influential group’s policies in the past have become the governments’. policies before.
The CPS report show the government has wasted 350 Billion GBP on pensions tax relief.
The report, entitled Costly and Ineffective: Why Pensions Tax Relief Should be Reformed
Mark Johnson, who wrote the report, recommended the following:
- No more 25% lump sum allowed
- An end to the Lifetime Allowance (no LTA)
- ISA and pension products should share an annual combined contribution limit of £30,000
- Pension pot should be passed on to spouse or named beneficiary upon death free from taxation
- No tax on dividends (well a 10p rebate to be precise) Instead these should be replaced by:
- Tax relief on pensions should be replaced by a Treasury contribution of 50p per £1 saved The CPS report claims Johnson’s radical proposals are in keeping with the spirit of last month’s Budget, at which Chancellor George Osborne announced a package of measures that give retirees unprecedented access to their savings.
The Nine Proposals that May Change the UK Pensions Landscape
Here is a summary of some of the proposals
- Pension contributions from employers should be treated as part of employees’ gross income, and taxed as such.
- Tax relief on pension contributions should be replaced by a Treasury contribution of 50p per £1 saved, up to an annual allowance, paid irrespective of the saver’s taxpaying status.
- Tax relief would be the same for everyone with a flat rate of income tax relief of 25% or 30%
- ISA and pension products should share an annual combined contribution limit of £30,000, available for saving within ISA or pension products (or any combination thereof). This would replace the current ISA and pensions tax-advantaged allowances.
- The 25% tax-free lump sum should be scrapped with a 5% “top-up” of the pension pot, paid prior to annuitisation
- The Lifetime Allowance should be scrapped. It adds considerably complexity to the pensions landscape, and with a £30,000 combined contributions limit for pensions and ISAs, it would become less relevant over time.
- The 10p tax rebate on pension assets’ dividend income should be reinstated.
- People should be able to bequeath unused pension pot assets to third parties free of Inheritance Tax (perhaps limited to £100,000), provided that the assets remained within a pensions’ framework.
- The rate of tax relief on contributions to children’s pensions should be increased to 30%, irrespective of the donor’s marginal rate of income tax.
- The annual allowance should be set at £8,000, with prior years’ unutilised allowances being permitted to be rolled up, perhaps over as much as ten years, all subject to modelling confirmation.
You can read the proposals in full here.
On the face of it, these new solutions seem fairer, especially for those toward the middle and lower income ranges. It may also encourage younger savers. For far too long, the higher rate tax payers have had it too easy when it comes to pension contributions.
The scrapping of the 25% cash lump sum would be unpopular though and would mean higher taxation on this portion. This is therefore unlikely then to go through or be put into draft before the next election.
Some of these new solutions are what is allowed already under Qualifying Recognized Overseas Pension Schemes (QROPS), for example no tax upon death.
The UK government is hell bent on revolutionizing pension schemes and simplifying them for the public. However, whilst this is giving pensioners what they want and ensuring the likelihood of a Conservative Party re-election, it is placing some pensioners in trouble for much later down the line. The movement away from annuities and toward investment will no doubt lift the stock market and give pensioners’ flexibility.
But, it is placing a lot more responsibility on the average pensioner to know how to invest their money. 8 out of 10 professional fund managers fail to beat the index, so the odds aren’t in favour of the man on the street getting it right.
Also, what happens when pensioners run out of money at a faster rate? The new GAD rules allow 150% of a pension per year in drawdown rather than 120%. That is a 25% increase! Whilst that means pensioners can access 25% more of their pensions now, it also means they will run out of their pensions more than 25% quicker due to lost investment as well as compound interest on those investments (if not invested elsewhere).
The government will increase their tax coffers now, but this will more than likely go to paying off debt. Now people are living for longer, but they could well have even less pension later in life which will put more pressure on the system and more burden on younger tax payers who will have to work longer and contribute more into the system to take care of the baby boomers.
The Future of Pensions – the Sting in the Tail
What would all this mean?
- Paying UK income tax at the marginal rate on your ENTIRE PENSION POT as no tax-free cash lump sum allowed.
Whilst these new changes in general are welcomed, with the notable exception of the cash-free lump sum allowed, there are still benefits for British expats in moving their pension pot(s) abroad to a single easily manageable place via a Qualifying Recognized Overseas Pension Scheme (QROPS).
- Gets your pension out of the UK tax net and avoids future changes to UK pension rules
- No tax upon death: 100% of your pension pot goes to whoever you wish
- Choose beneficiaries upon death and who gets what percentage
- Choose which currency your pension pot is denominated in
- Choose your investments from a huge universe of funds, ETF’s, precious metals, bond funds, etc
- Can move your pension into a tax-efficient wrapper if you ever intend to move back to the UK
- The ability to target high returns. The average real annual return on all UK pension funds was a paltry 2.9% according to the report. A QROPS can help target higher returns if invested wisely
Please contact us if you want a transfer value analysis of your pension pot.9 Proposals for the Future of UK Pensions by Richard Malpass