The Treasury is currently consulting on introducing massive changes to the way pensions operate. Yet this consultation is going on behind closed doors,
While the Freedom and Choice in Pensions consultation asks for views on consumer guidance, transfers from DB, and the effect of the proposed changes on financial markets, it is largely silent on the changes to the tax system that will be needed to prevent massive tax leakage.
The chapter on the new tax structure talks only of facilitating innovation, not stopping recycling and mass salary sacrifice into pensions.
Yet, as revealed by Corporate Adviser in May, the government is consulting on introducing fundamental changes to the way pensions work – changes that will have extensive ramifications for employers, employees, individual savers, part-retirees, providers and advisers.
These changes are necessary – without them, the most extreme interpretation of the new rules means £24bn of revenue a year in NI and income tax could be lost to the public purse if everyone over age 55 sacrificed salary into pension up to £40,000. Even if individuals were paid salary of £11,500 to meet minimum wage rules, potential losses extend way beyond £10bn a year.
By opting for pension via salary sacrifice, someone on £40,000 could cut their total tax and NI bill almost in half, from £9,845 to £4,997. Factoring in lost employer NI, the total cost to the Revenue would be £5,484, a loss off 62 per cent.
This is clearly not going to be allowed to happen. Corporate Adviser understands four options are on the table. What do you, the experts, think is the best way for the government to close the door on abuse of the proposed new freedoms? Give us your views and you could win a bottle of champagne.
1. Abolish tax-free cash on future contributions for anyone who draws benefits. Investment growth still attracts tax-free cash. Understood to be the front-runner at the Treasury.
Pros. Goes some way to discouraging people from treating pension as salary. Reinforces pension’s role as retirement saving vehicle, not mid-life slush fund.
Cons. Makes anyone who draws tax-free cash a second-class pension saver going forward. Anyone planning to access tax-free cash to clear mortgage or pay for children’s education fees would have to rethink their strategy. Presents severe challenges to DWP’s policy of promoting phased retirement for older workers. Doesn’t fully solve the problem as NI savings still huge. For workers with low pension contributions, saving 12 per cent NI and 25 per cent income tax would still outweigh loss of tax-free cash going forward
2. Introduce National Insurance Contributions on pension contributions for employees who have drawn benefits.
Pros. Reduces attractiveness of paying pension over salary. Raises billions in revenue.
Cons. A new tax on employers in an election year. Creates two tiers of employee within the workforce. Massively complex to administer.
3. Reduce the annual allowance, say to £5,000 a year, for anyone who draws benefits.
Pros. Would stop widespread abuse of salary sacrifice into pension by the over 55s.
Cons. Complex to administer. Requires employers and providers to know whether an individual had already drawn benefits. Near impossible to impose on public sector workers without strike action. Still allows older workers to receive, say, £5,000 a year of salary free of NI, a quarter of which is tax-free. Would become the new benchmark for payment in some industries.
4. Complex anti-avoidance rules.
Pros. A complex solution would reduce negative headlines for the government. Complex rules could slow the spread of tax avoidance and would stop bigger organisations with reputations to protect from engaging in more tax efficient remuneration strategies.
Cons. Would introduce widespread complexity just as auto-enrolment is rolling out. Would be hard to enforce, leading to potentially widespread tax avoidance and loss of revenue.
5. Policy U-turn.
Pros. Solves the problem of massive potential tax leakage immediately. Concerns over individuals running out of money before they retire disappear.
Cons. Massive political damage as a very popular policy is lost. Benefits of freedom and choice lost forever. Pensions perceived in an even more negative light.
If you have any other solutions, we would love to hear from you. Please email your suggestions as to how the Treasury can solve this issue to firstname.lastname@example.org.