Hammond Eggs in Mouth (not on face) Tax Raising Ideas
4 April 2017
Comment from Adrian Boulding, Head of Retirement Strategy at Dunstan Thomas
Adrian comes up with 5 pensions tax raising wheezes to stave off repeat ‘Hammond Eggs on his face’ headlines next time around After the furore that was perhaps best summed up by the front-page headline in the Metro on Thursday 16th March as ‘HAMMOND EGG ON HIS FACE’, following the Chancellor’s U-Turn on National Insurance Contributions (NIC) that he planned to levy on self-employed workers - in breach of the Conservative Party’s manifesto pledge - it seemed sensible 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-tax payers
I decided to look at remaining pensions tax relief loop holes and there are still a few. Take for example Pensions Tax Relief At Source (PTRAS) which enables members contributing to their pension scheme to automatically 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 don’t need tax relief if you are not paying tax? This seems like an unnecessarily over-generous tax giveaway which HM Treasury could close off –saving a good amount of money there, 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 get a hand out from the tax man 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 6th April 2017. . Reports reveal that in many parts of the country now, ISA balances exceed £10,000. Savers in the Southeast and Scotland – in Edinburgh, Perth, Aberdeen, and Kirkcaldy for example, balances now exceed £13,000, while in Harrow they’ve got 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 which 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 will 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 aren't care packages for them to leave.
This is a looming crisis which 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 with comes with an increasingly ageing population. Savings are already taxed this way in Denmark!
3. Introduce Inheritance Tax 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 straightened 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 demand whatsoever. It’s effectively excluded from the estate’s assets for tax purposes. It’s a complex area but essentially, despite much change in this area, 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. Combating the Lamborghini-buying excesses of Pension Freedoms & helping pay for the growing role of The Pensions Regulator
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 which 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 HMT salivating.
Since 2015, when Pension Freedom & Choice 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.
However, shouldn’t we 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 can pay for the 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 a minimum of 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.
But since 2013, a hot 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 like Ros Altmann have been calling for its demise. The current Government commitment to the Triple Lock lasts only for this Parliament.
But 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 15m 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? This 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 Mr 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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