Steve Herbert, Head of Benefits Strategy at Howden Employee Benefits, takes a look at what’s happening in UK pensions
dead–calm. Adjective. completely still with no waves.
Somewhat surprisingly I find that workplace pensions haven’t appeared much in my Employer News column since it began last December.
So why have I been so quiet on this topic of late? The reason is simply that for most employers the UK pension’s world has been experiencing a period of unusual calm over the last few months.
This is partly due to the initial complexities and challenges of Pensions Auto-Enrolment now becoming an everyday task for employers, combined with the knowledge that future edicts and adjustments in this space are still only vaguely formed in the middle-distance. And of course politically there has been little legislation-led change in recent months given that UK politicians are currently otherwise engaged with the all-absorbing Brexit process.
But this situation will not persist forever.
Indeed the storm clouds of major change around workplace pension savings may already be darkening the horizon. And it’s quite possible that when the storm breaks it will once again focus on the rather tempestuous subject of the tax reliefs offered to encourage the UK to save for its collective old age.
The costs of pension tax relief
In 2018 Philip Hammond described the costs of pension tax relief as “eye-wateringly expensive”. He has a point. Figures releases by HMRC earlier this year suggest that the current reliefs total some £43.7bn per annum, and it’s a cost that is actually rising. The success of Auto-Enrolment – and the increases to the statutory minimum levels of pension contributions under these arrangements – is adding to the government’s total spend.
So it’s not surprising that this is a spending area regularly under review by the Chancellor of the Exchequer and HM Treasury as part of their usual annual Budget planning process.
But things are far from usual at the moment. Right now the UK faces unprecedented political and economic uncertainty. This may encourage the new Chancellor, Sajid Javid, to consider dramatic alterations in this policy area once the dust settles on the Brexit debate. And any such changes in this space will pose entirely new challenges to employers and employees alike.
We have been here before
It could be argued that significant changes in this space are already well overdue.
In 2015 a formal consultation was undertaken by HM Treasury focusing on the tax-relief system for pension savings. As a result it was widely expected that the March Budget statement of 2016 would confirm wholesale alterations to that system, and indeed all the early signals from Whitehall and Westminster supported that assumption.
Yet any such plans were dramatically shelved following the announcement of the EU Referendum at that time. Roll-forward three years – and a similar number of Prime Ministers and Chancellors later – and the same fiscal drivers and rationale still exist. So it’s probably time to accept that changes to the current pension tax relief system might well be just around the corner.
Wholesale change or just tinkering?
So how significant might that change be, and what steps should employers now be taking?
Firstly it is important to understand that changes to the systems of tax relief are not always headline-grabbing. Indeed it is quite possible (and sometimes politically expedient) for the Chancellor to announce seemingly minor changes that nevertheless help contain the overall costs to HM Treasury.
Examples of this approach in practice can be seen in the now (increasingly complex) set of tax-relieved allowances for pension planning. The Annual Allowance and Money Purchase Annual Allowance have both reduced in recent years. And the Lifetime Allowance for tax-relieved pension savings has been dramatically cut too (despite some relatively small increases recently). For details of the current allowances please see this link.
Politically the advantage of such apparently cosmetic policy decisions is that the impact is felt almost entirely by higher earners rather than the general working population, and this is therefore much less of a news story for the national media. Yet as these allowances continue their descent they are starting to impact increasing numbers of middle-income workers. So alterations in this space still represent challenges for employers – not least ensuring that they fully understand and communicate any such changes early and well to avoid any complications for individuals and/or corporate body.
But it is still possible that a much more dramatic change to the tax-relief system might be announced.
In 2016 the options under consideration apparently included the total removal of higher-rate tax relief, limiting the amount of relief to a maximum amount for all savers, or actually removing tax-relief altogether and replacing traditional pension arrangements with something more flexible but not necessarily as tax-efficient. These are very real options which doubtless have already been considered, and almost certainly will be considered again given that amount of government money involved.
Yet any change as seismic as those noted above would take time to implement – not least because this would add another major administrative hurdle for both the government and employers to understand and implement just as the UK is adjusting to the even more significant challenges of Brexit. So even if wholesale changes to pension tax relief were announced in the autumn Budget, it’s fair to assume that the implementation date would need to be set to a later tax year (perhaps 2021/22?) to give everyone time to adapt and adjust accordingly.
So for the moment it’s just a case of business as usual for employers. But best to be aware that some fast-moving winds of change might well be approaching workplace pensions soon.
In the meantime – and as I always point out at these moments of uncertainty – the best plan is to really encourage employees to take advantage of the very generous tax-breaks still offered within pension plans whilst they remain available.
Or to put it another way, it’s a case of making hay whilst the sun shines.
Steve Herbert is Head of Benefits Strategy at Howden Employee Benefits