To help him avoid any repeats of the 'Hammond egg on his face' headlines after the next Budget, Adrian Boulding suggests five pension tax-raising wheezes for the Chancellor to consider
After the furore that was perhaps best summed up by Metro's front-page headline on 16 March of "Hammond egg on his face", following the Chancellor's U-turn on National Insurance Contributions (NICs) he planned to levy on self-employed workers - in breach of a Conservative Party manifesto pledge - it seemed kind to come up with a few alternative pensions tax-raising options for his team to chew over in advance of the next Budget.
1. Scrap PTRAS for non-taxpayers
I decided to look at remaining pensions tax relief loopholes and there are still a few. Take for example pensions tax relief at source (PTRAS), which enables members contributing to their pension scheme automatically to claim tax relief at the basic rate of 20%.
The amount paid to the scheme is treated as having had an amount equivalent to basic rate tax deducted. The scheme administrator claims the basic rate tax relief from HMRC and adds it to the pension pot.
This applies whether or not the member pays tax. But surely you do not need tax relief if you are not paying tax? This seems like an unnecessarily overgenerous tax giveaway which HM Treasury could close off - saving a good amount of money - especially as auto-enrolment is drawing in around two million non-taxpayers.
Lots of directors of companies, large and small provide, a pension to their partners who do not actually work in the business - these sleeping partners would no longer receive a handout from the taxman as well as their partner's business.
2. Introduce social care levy on savings
Since the start of the Coalition Government, ISAs have been enjoying rude health as the annual ISA allowance has increased from £7,200 in 2009/10 to £20,000 from 6 April 2017. Reports reveal that, in many parts of the country now, ISA balances exceed £10,000.
In the Southeast and Scotland - in Edinburgh, Perth, Aberdeen, and Kirkcaldy, for example - average balances now exceed £13,000, while in Harrow they have an average ISA balance of £15,476 and in Bromley its £14,443. Is it time therefore that some of this surplus saving is commandeered by the government to pay for the rising social care needs that right now they/the NHS/we seem unable to afford?
We have read all the headlines about so-called ‘bed-blocking', where elderly patients who would be much better served in a local care home, instead have to stay in hospital because there is nowhere to move them where they would have adequate care.
The bed-blocking, in turn, causes the crisis in A&E departments, which in England is worse than ever before, according to the British Medical Association. One of the biggest problems is delays in social care assessments, which means patients are stranded in hospital because there are no care packages for them to leave.
This is a looming crisis that could be paid for by as little as a 0.5% social care levy on ISA savings. It seems little enough but, collectively, it could raise enough to go to work on one of the defining problems of our age - paying for the rising health and social care burden that comes with an increasingly ageing population. As a point of comparison, savings are already taxed this way in Denmark.
3. Introduce IHT on pension contributions
This idea is perhaps a little less popular but nevertheless closes out a tax exemption that could be considered too generous in these more straitened times. Right now, when trust-based pension scheme-holders pass away, the discretionary trust in charge of the scheme can pass the benefit of the pension across to the beneficiary without any inheritance tax (IHT) demand whatsoever.
It is, in other words, effectively excluded from the estate's assets for tax purposes. It is a complex area but essentially, despite having seen much change, this IHT loophole persists. Again, we need to ask ourselves - do we need to allow relatively wealthy estates to avoid paying IHT on pension income through sophisticated discretionary trust arrangements?
4. Combat the ‘Lamborghini-buying' excesses of pension freedoms and help pay for the growing role of TPR
Because of changes set to be enforced by the new Pensions Bill going through Parliament right now, The Pensions Regulator (TPR) will expand its powers - and associated workforce - to authorise master trusts under its new master trust assurance system designed to protect members' benefits from poor administration or business failures that makes their workplace schemes vulnerable.
But how will the expansion be paid for? Instead of increasing the levy on pension providers, why don't we increase the tax on those cashing in their entire pension pots before the state pension age? Now there's a plan that should get the behavioural economics wonks in HM Treasury salivating.
Since 2015, when pension freedom kicked in, more than 500,000 over 55-year olds have fully cashed in their pension pots, worth a total of £9.2bn, delivering £2.6bn additional revenue to the Treasury.
Should we not, however, be discouraging these so-called ‘Lamborghini excesses' of pension freedom by imposing an additional tax burden to discourage full cash-outs by those who are cashing in their retirement nest egg before the prescribed state retirement age?
And if the additional monies raised by this new ‘Lamborghini Effect Deterrence Tax' - call it a working title - can pay for TPR's additional regulatory workload, thereby protecting the more than seven million people already auto-enrolled, mostly into the newly popular master trusts, then this is surely an additional pensions tax that would be well-directed?
5. Triple lock protector tax
The triple lock was introduced by the coalition government in 2010, guaranteeing the increase of the state pension every year by the higher of inflation, average earnings or 2.5%. The guarantee was introduced to protect pensioners from meaningless increases, such as the 75p a week increase that was given in 2000, and to restore some of the value lost since Margaret Thatcher cut the earnings link in 1980.
It has worked well in this regard - for example, by April 2014, the basic state pension was £440 a year higher than it would have been if it had been increased in line with the increase in average earnings.
Since 2013, however, a heated debate has been raging in the industry about whether the nation can really afford the triple lock. So much so that even some of the wisest heads in the pensions world, such as Ros Altmann, have been calling for its demise. The current government commitment to the Triple Lock lasts until the slated end of this Parliament in 2020.
Still, rather than back-pedalling on this valuable promise to the nation's future retirees, why don't we introduce an automatic enrolment levy on workplace pension scheme holders?
Some 15 million have solid workplace pensions today - either through auto-enrolment or earlier voluntary schemes. A small levy of say £20 per year on each member would deliver £300m a year, which could cover the average £257m annual cost to the Treasury of the triple lock since its inception. That, surely, seems a fair price to pay for security for the nation's elderly? It could be real vote-winner for the next Conservative manifesto.
These are just my thoughts, but which pensions tax idea would you vote for and more importantly which do you think Hammond could sell to the nation more successfully than last month's ill-fated NIC raising, manifesto-busting cash call? The man needs cash and fast - how can we, as an industry, best advise him to raise it?
Adrian Boulding is director of retirement strategy at Dunstan Thomas
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