John Moret is one of the UK’s leading pensions and SIPP experts and commentators. As he enters his 75th year, still working part-time, he begins the first in a monthly series for Financial Planning Today looking back at his long career and key topics which have steered the pensions sector. He starts with a timely look at the Chancellor’s pension bombshell Budget delivered only yesterday.
Pensions taxation – Plus ça change, plus c’est la même chose
I started my career in 1970, which was a big year in the world of pensions taxation, as the Finance Act 1970 introduced a new code of control of pension schemes. Shortly afterwards I acquired a book with the title “Pension Schemes – The New Approval Code” written by a well known actuary Eric Brunet.
I still have that book and what is remarkable is that in just 118 pages the author was able to provide a comprehensive and detailed analysis of the new pensions tax system and rules. Contrast that with the situation today when many very large volumes would be needed.
The title to this article is taken from one of the chapter headings. In the last chapter of the book the author looks forward and suggests that tax relief on contributions and fund accumulation is given in exchange for a tax liability on benefits as they become payable and that this should apply not only to pensions but also to lump sums whether they arise on retirement or death.
Wind the clock forward over 50 years and bizarrely we find the Institute for Fiscal Studies making the same suggestions in their excellent recent reports – see in particular, “A blueprint for a better tax treatment of Pensions” published in February.
I originally drafted this article prior to the Chancellor’s recent budget announcing plans to abolish the Lifetime Allowance (LTA) and increase the annual contribution allowance to £60,000.
Some 20 years ago the Pickering review led to a new “simplified” pensions tax regime introduced in 2006. The two main aspects of the simplified regime were a new lifetime allowance(LTA) – initially £1.5m rising to £1.8m in 2010 and a new annual contribution limit of £215,000 rising to £255,000 over the same time period. No-one has ever explained satisfactorily to me the need for the two tax limits – it appears to have been a political decision.
I have always held the view that the LTA is a superfluous anomaly. I believe it is the existence of these two limits which have allowed so much political interference in the pensions tax regime. Set a reasonable limit on the annual allowance and the need for the LTA disappears – unless one is looking to penalise unjustifiably above average investment performance.
So I welcome the Chancellor’s announcement that he plans to abolish the LTA from 2024. Remove the LTA and the need for protection regimes and the absurdly complicated 13 benefit crystallisation events should disappear.
The limits have led to many of the current complexities, not least the tapering of the annual allowance for high earners. Sadly successive governments have destroyed any semblance of simplification and year by year the layers of complexity increase.
I have often wondered about the administrative cost of these complexities, which I suspect rival the cost of the tax reliefs themselves. It will be interesting to see the details of the transitional arrangements in the run up to 2024 to see just how much of the complexities have been removed.
But there is still the question of why is age 75 sacrosanct? The cliff edge for IHT and income tax free distribution of death benefits is nonsensical and I believe age 75 originates from the pre-drawdown era when you had to purchase an annuity by that age.
The latest Budget proposals are a step in the right direction but there is so much more that could be achieved through a radical reform of pensions taxation – not least a much increased understanding among the population at large.
Sadly, I suspect any such reform is most unlikely to happen due to short-term thinking by governments when essentially we are looking at long term issues. Hence the title of this article.
John Moret is principal of MoretoSIPPs consultancy and one of the UK’s most experienced SIPPs experts, commentators and speakers. He has worked for Suffolk Life and several other SIPPs providers. He is chair of advisory business Intelligent Pensions and CX insight business Investor in Customers.
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