Osbourne's tax relief changes in the March budget

hyubh

hugheskevi wrote: »

You start making the new public service pension schemes unviable if you do that.

A £20,000 Annual Allowance would see all Civil Servants earning over £54,000 breach each year, and all Local Govt members (choosing full accrual) earning over £61,250 breach every year.

It would hardly make the current LGPS 'unviable' to introduce tax changes that would affect a membership fraction that is (a) very small in number and (b) can opt into the 50/50 section anyhow, like anyone else. If anything the latter would actually make the LGPS a bit more viable since it would help deficits, in a small way...

There would be more too, as many will have final salary linked service would could lead to a pension input if salary increases by more than CPI even though they earn less than the amounts above

Yes... although enabling members to defer their final salary accrual (and start afresh in the CARE scheme) if they so choose would solve that.

If even a fairly small proportion of those affected opt-out of the scheme, the Exchequer loses their employee pension contribution, and the annual cost of funding pensions increases (there is of course a long-run saving from opt-outs, but the way Government accounting works largely ignores the long-term cost of pensions).

Presumably you've stopped talking about the LGPS...? (Which isn't to say mass opts out of, say, the bulk of the membership earning less than 61K wouldn't be an issue... but not for that reason.)

chiefie

I can see the public sector pensions going sooner or later. I don't advocate that at all, I can just see them making the case yet again.

zagfles

hugheskevi wrote: »

It is a trivial change for Defined Contribution pensions, and a nightmare for Defined Benefit pensions.

For a Defined Contribution scheme, just treat employer and employee pension contributions as salary (so they are eligible for income tax and national insurance), and then apply relief-at-source with 30% added to the combined employer and employee contribution and reclaimed by the provider from HMRC. That is all pretty trivial stuff, some payroll changes needed, but nothing too difficult. Not something that would happen overnight, but an April 2017 start date should be achievable.

But for Defined Benefit schemes the situation is completely different. The employee pension contribution is known, but the employer contribution is to the scheme as a whole, not the individual member. So you couldn't simply take a similar approach. Instead, you would need to value how much the employer contribution is worth to an individual's pension accrual on an individual basis. This is what the Annual Allowance and Lifetime Allowance currently do, taking a very simple approach of multiplying annual pension accrual by 16 and 20 respectively. The result is extremely inaccurate, but only affects a small number of people (who may pay far too much or far too little, depending on their age, their scheme normal pension age, their age at pension commencement and other factors compared to what they would owe if the value was calculated accurately).

So, it is necessary to accurately value the pension accrual of all Defined Benefit scheme members. This has to be done for other reasons, in particular transfers and divorce. A similar approach could be used, but the scale is completely different - administrators would only usually have to calculate a handful of CETVs each month, whereas under this approach they would have to be done for the entire active membership. That is a new major annual exercise. Some schemes would find it fairly straightforward (larger schemes with modern administration and actuarial support in particular) but the world of Defined Benefit can be extremely antiquated, and small and medium-sized older schemes can have very basic administration.

Assume a system has been set up to accurately value the pension accrual, and no changes have been made to the pension scheme (both huge assumptions). Now higher and additional rate tax-payers need to have a pension debit applied, whilst lower and nil rate payers need a pension credit applied. Again, these are existing processes, but on a completely different scale, and all taking place at the same time. Plus, to know an individual's tax status a link between the scheme and HMRC will be needed for schemes to apply the correct pension adjustment.

Hopefully that gives a bit of insight into the nightmare that the policy would be for Defined Benefit schemes, if Treasury decide to have the same system for both Defined Benefit and Defined Contribution schemes. Certainly not deliverable overnight, and April 2017 would seem very optimistic. There are many different possible approaches, the above is only one possible way, but all of them run into significant issues, especially if there is a desire for individuals to have the same take-home pay but just accrue a different amount of pension...Defined Contribution members can easily tweak contribution rates to achieve this, but Defined Benefit schemes will find it very difficult.

Do you think they'll be too worried about the accuracy of contribution values? The consultation document highlighted that simplicity was a prime factor. Plus with taxable benefits like company cars, it's not all done on value, C02 emissions are a factor, so govt objectives can skew the way they choose to value benefits, rather than just trying to accurately value the benefit.

They could go for the simple valuation approach like they do for the AA, 16 times real increase in annual pension. This would be trivially easy for CARE type schemes, eg in a 1/49th scheme the pension contribution value would be 16/49 of salary.

Or they could tweak it to encourage younger people to contribute, also to get a better valuation as it's worth less for younger people, eg say 10 times for under 40's, 20 times for over 40's or some sort of scale.

FS schemes are a lot harder...but they could do similar to above with some mechanism to spread the effect of a big payrise over a few years...

hugheskevi

It would hardly make the current LGPS 'unviable' to introduce tax changes that would affect a membership fraction that is (a) very small in number and (b) can opt into the 50/50 section anyhow, like anyone else. If anything the latter would actually make the LGPS a bit more viable since it would help deficits, in a small way...

The LGPS scheme (and the unfunded schemes) remains perfectly viable, but there is a higher earner problem (which already exists, albeit at a higher level, currently a bit over £100,000). I have no idea how much of an issue this would be among LGPS employers, but many public sector employers will find this a very significant issue. If a pension scheme is not working for all the higher earners (and £54,000 isn't particularly high) then it has to questioned whether it is going to be viable in the longer-term. Particularly when historically the public sector has relied on good pensions as a key recruitment and retention tool.

In a sensible world, higher salary can be awarded to compensate for significantly reduced pension value to maintain the remuneration package necessary to attract the appropriate talent. In practice, salary increases in the public sector are considered inappropriate at the moment, particularly at the top end, and especially to mitigate a pension tax change, hence creating a practical issue about remuneration levels for higher earners and retention/recruitment issues.

The private sector are much better placed to make changes along the lines of higher salary in return for lower pension at higher earning levels, as they are not subject to the same political constraints (and in the case of the unfunded public sector pension schemes, funding considerations).

Presumably you've stopped talking about the LGPS...? (Which isn't to say mass opts out of, say, the bulk of the membership earning less than 61K wouldn't be an issue... but not for that reason.)

Yep, only really relevant to the unfunded schemes, but there are a huge number of members of those.

Do you think they'll be too worried about the accuracy of contribution values?

A good question. I would usually have said yes, but we already have the precedent of taxing people real money based on wildly inaccurate estimation processes. If you tolerate it for higher earners, perhaps it could be tolerated for all. It does primarily affect public sector, which could increase the probability of using an inaccurate valuation system.

I think it would be possible to use a scaled-up CETV-type estimate system. The cost and delivery would fall on schemes, and based on recent Annual Allowance changes there seems to be quite an appetite for frequent change which increases administration burdens for schemes and individuals but puts a minimal burden on HMRC. That would be my guess as what is done if the same treatment is applied to DB and DC schemes.

RickyB2000

hugheskevi wrote: »

The LGPS scheme (and the unfunded schemes) remains perfectly viable, but you have a higher earner problem (which already exists, albeit at a higher level, currently a bit over £100,000). I have no idea how much of an issue this would be among LGPS employers, but many public sector employers will find this a very significant issue. If a pension scheme is not working for all the higher earners (and £54,000 isn't particularly high) then it has to questioned whether it is going to be viable in the longer-term. Particularly when historically the public sector has relied on good pensions as a key recruitment and retention tool.

In a sensible world, higher salary can be awarded to compensate for significantly reduced pension value to maintain the remuneration package necessary to attract the appropriate talent. In practice, salary increases in the public sector are considered inappropriate at the moment, particularly at the top end, and especially to mitigate a pension tax change, hence creating a practical issue about remuneration levels for higher earners and retention/recruitment issues.

The private sector are much better placed to make changes along the lines of higher salary in return for lower pension at higher earning levels, as they are not subject to the same political constraints.

Don't you have the same problem if the 40% relief is reduced? Surely future DB pension accrued would have to be reduced, or employee contributions increased. It wouldn't seem very fair (I know, what has that got to do with it) if they pay less into their pension but still get the same benefit (I assume all private employers would have to make this change)

RickyB2000

EdSwippet wrote: »

It probably would be easier. It solves the 'hit the successful' part of the government's "strategy", but does nothing to encourage pension saving in basic rate taxpayers.

You need carrot to balance stick. Flat rate relief is assumed to provide that carrot. But for it to work relies on taking benefit from one group to give to another. The first group might adjust -- work less, save in VCTs or pension alternatives, retire early -- so that the carrot cannot be funded.

Ah, good point - if the strategy is to improve lower tax payers pensions. However, To me, it is not a carrot to save more. What it does is ensure those pots people will create anyway will be a bit larger. It is like the government enforcing workplace pensions and then adding a bit extra. Basically the government is pulling the strings so people have enough without them having to think about it.

I say that, because my experience is most people at best have no idea how pensions work and at worst don't trust them one bit. The only people who do tend to be higher earners, often with complicated tax affairs that require greater understanding of the system. Or people with a lot of cash looking for tax efficiency. I know young people who have passed on generous defined benefit pensions to have the cash now. I know older people who whatever you say will not trust pension and have only built up small pots.

saver861

hugheskevi wrote: »

In a sensible world, higher salary can be awarded to compensate for significantly reduced pension value to maintain the remuneration package necessary to attract the appropriate talent. In practice, salary increases in the public sector are considered inappropriate at the moment, particularly at the top end, and especially to mitigate a pension tax change, hence creating a practical issue about remuneration levels for higher earners and retention/recruitment issues.

Certainly there is a balance to be achieved here. The DB schemes have been slated by many limited to DC schemes. However, the reality is, for many years opportunities, salaries etc in the public sector were not commensurate with those in private.

LGPS is now a CARE scheme so while many of those in their later working lives might benefit more from the 1/49, the overall scheme is less beneficial to those starting out.

Recruitment and retention is an issue for many areas currently. Many want to get out ... ask some working in the NHS etc.

hugheskevi

Don't you have the same problem if the 40% relief is reduced? Surely future DB pension accrued would have to be reduced, or employee contributions increased. It wouldn't seem very fair (I know, what has that got to do with it) if they pay less into their pension but still get the same benefit (I assume all private employers would have to make this change)

Yes, much the same issue applies. The most likely method being a form of pension debit as applies under Scheme Pays options under the current Annual Allowance, so schemes do not have to change.

There are differences though between who is affected, compared to a much lower Annual Allowance. A lower relief rate affects higher rate taxpayers, reducing relief on higher rate by 10-15% (assuming a flat rate of 25-30%) but the Annual Allowance only applies above the breach amount (which will be higher than the higher rate threshold) but then reduces relief by 40% (or more).

Ah, good point - if the strategy is to improve lower tax payers pensions. However, To me, it is not a carrot to save more. What it does is ensure those pots people will create anyway will be a bit larger. It is like the government enforcing workplace pensions and then adding a bit extra. Basically the government is pulling the strings so people have enough without them having to think about it.

Salary sacrifice cannot be ignored. All the mutterings from HMRC suggest that salary sacrifice will be removed if there are major reforms. That will make pension saving less attractive for many basic rate taxpayers (who currently get relief at 32%+ on contributions). Some basic rate taxpayers without access to salary sacrifice will be better off, but that could easily be less than half of private sector employees saving into a pension (I've never seen comprehensive statistics about use of salary sacrifice, the last I saw was that 50% of private sector occupational scheme members used salary sacrifice, but that was several years ago).

_CC_

I was thinking about this the other day

Do we know how much the Treasury spends when it comes to the various tax relief brackets for contributions?

If it's possible to stay around cost neutral by introducing a single tier relief which is higher than 20% then I can see that be very tempting politically, and personally I think it's a decent idea. Unsure if the maths makes it a no-go, though.

Not sure how the ISA idea would work - so you'd get no relief on the contribution, severely limiting the capital growth of your pension pot, and then hope a future government sticks to its promise of not taxing the income? Doesn't sound too great.

chiefie

_CC_ wrote: »

I was thinking about this the other day

Do we know how much the Treasury spends when it comes to the various tax relief brackets for contributions?

If it's possible to stay around cost neutral by introducing a single tier relief which is higher than 20% then I can see that be very tempting politically, and personally I think it's a decent idea. Unsure if the maths makes it a no-go, though.

Not sure how the ISA idea would work - so you'd get no relief on the contribution, severely limiting the capital growth of your pension pot, and then hope a future government sticks to its promise of not taxing the income? Doesn't sound too great.

From what I have read previosly 30% is cost neutral so when the change comes I expect 25%