Pension minister Steve Webb faced a barrage of questions from MPs on the Pensions Scheme Bill over allegations made in Corporate Adviser that the pension reforms could cost £2bn or more in lost tax revenue could in 2015/16.
Webb came under sustained pressure from Labour pensions shadow Gregg McClymont to confirm whether the Government had been aware of the potential NI and tax leakage risk created by the freedom and choice changes, and if so, what figure the Government had calculated the potential loss to be.
Speaking as a witness to the Pensions Scheme Bill yesterday, Webb said he had not seen a breakdown of the calculations made by the Treasury that would show the extent of potential leakage, and said McClymont would have to ask Treasury officials for their estimates of the potential tax and NI loss.
The grilling came hours after Webb, in his capacity as a member of the committee, had questioned evidence given by Corporate Adviser editor John Greenwood that there was a risk of tax and NI losses running into billions of pounds in the first year of the reforms. Greenwood had pointed to a survey at this month’s Corporate Adviser Summit that showed two thirds of adviser delegates, including many of the most senior DC experts in the country, thought at least 10 per cent of the £20bn or so that could potentially be avoided would be lost to the Treasury in 2015/16.
In that session Webb had repeatedly questioned Greenwood’s calculation that around £20bn of tax and NI could be avoided if everyone between age 55 and state pension, yet in the later session in which he was a witness, was unable to confirm whether the Treasury or Office for Budget Responsibility had made their own assessment, let alone what their estimate of the size of the losses would be.
Webb had also questioned why the ability to take £30,000 through trivial commutation this year had not been taken up, arguing that if this was not the case, then it was unlikely sacrificing large amounts of salary into pension would become commonplace.
Webb suggested that the Government was comfortable that the penalty of the reduced annual allowance was sufficient, suggesting an acceptance of using the strategy of maximising pension contributions by reducing salary for over 55s.
Webb said: “The concept of salary sacrifice, and this is a variation on that, is well known to the Treasury. You get to pay your money through a route that doesn’t involve National Insurance, everybody gains.
“So this is already part of remuneration strategies. The Treasury and HMRC are already well aware of that and that is the mindset with which they look at any reforms. So I don’t think anything in this conversation will have come as any great shock. What we have said is that in these new pension freedoms that anybody who does this kind of thing suffers a penalty. And the penalty they suffer is that at the moment each year you are allowed £40,000 tax-free allowance. The second you take some taxable cash after the age of 55, that £40,000 slumps to £10,000.
“So there is a negative consequence for people. Of course you can do it once and get a potential benefit but thereafter you can never get more than £10,000 pension saving. I think John Greenwood underestimates the penalty value of that.
“Clearly we keep an eye on these sorts of things. The £10,000 measure that I have described was there to discourage people from just cycling their money through. There is a recognition that there is always a risk of this kind of thing but I think there are a number of barriers. So for example the employer has to have a conversation with the employee. There is probably a contract of employment that would be impacted. There may be HR and contractual implications. You may have to set up a pension arrangement.
“My question to John Greenwood was you can do this this year and we don’t see this happening. I am not saying nobody is doing it, but we don’t see this happening on a significant scale. The first £30,000 you can take as a pot this year. So why aren’t people doing it? Because there are lots of barriers.
“I am not saying it couldn’t happen. I am not saying it won’t happen. But we don’t think we will see it happen on the sort of scale that is being talked about here.”
Pressing the pension minister on whether the Treasury had understood the problem before the budget was published, McClymont asked: “The government must have done some analysis to see if this is a big problem. Is there any chance of us seeing that analysis?”
Webb said: “The figures that I have seen are the aggregate figures. So I have not seen any breakdown and in fact I am not convinced that the figures are done in that way. What the Treasury has done is look at the package as a whole, come up with a global figure for the impact they expect from tax revenues, that has been ratified by the OBR. I wasn’t involved in the drawing up of those further figures, so in terms of further detail my colleagues at the Treasury will deal with that. But this figure we have published is the government’s best estimate, ratified by the OBR of the fiscal effect of the reform.”