Midnight on 31 December 2019 saw me enter my sixth decade of working in the pensions industry.
Looking back I think the two biggest influences over those fifty years have been technology and longevity. It’s hard to believe that there was virtually no automation when I started. Calculations were made using a hand operated Monroe calculator which are now a collector’s item.
And in 1970 the life expectancy for a man was 68.7 years – 50 years on a new born boy can expect on average to live 91 years.
1970 saw the introduction of a new tax approval code for pensions. I still have a copy of a booklet written by a leading pensions actuary Eric Brunet in the early seventies which in just over a hundred pages provided a detailed commentary on the provisions of the new tax code. I suspect a similar summary today would run to well over a thousand pages!
Revisiting this booklet I came across the following: “It has frequently been the subject of severe criticism that fiscal considerations should take priority over social objectives. The view is widely held that even on a fiscal plane the restrictive nature of legislation causes problems quite out of proportion to their importance ….”. The conflict between the cost and control of pensions tax incentives and improvements in social policy clearly isn’t new but are we any further forward in resolving this conflict? I suggest not.
The Pensions Commission in its report in 2005 shied away from tacking the tax relief issues party because of the complexities posed by Defined Benefit schemes but also because the pensions simplification project was already well advanced leading to the A-Day changes introduced in 2006.
Although the simplification project was well intentioned it has led to mind-blowingly complex rules and regulations and arguably also was a major factor in facilitating the pension scams that have plagued the SIPP and SSAS world.
The law of unintended consequences has also delivered a situation where today if you don’t pay income tax and your employer administers your payroll you don’t receive the tax relief you are entitled to. Worse still the complex rules around converting defined benefit accrual into a notional pension contribution and the associated tax relief tapering rules have exacerbated the problems in the NHS with consultants working less hours or retiring early.
The government is already committed to reviewing the tapered annual allowance with an announcement to be made in the Budget in March.
The Pensions Bill published earlier this month provides more powers for The Pensions Regulator, allows for the creation of collective defined contribution schemes and the pensions dashboard and provides for yet more regulations around defined benefit transfers and consultation on funding principles for defined benefit schemes.
All very laudable but hardly likely to encourage more pensions savings. The complexities of the pensions tax system seem set to remain as will the duplications and inconsistencies caused by two regulators of pensions and two ombudsmen.
At the start of 2020 the chief special adviser to the Prime Minister, Dominic Cummings, caused a stir by asking for new and radical thinking from a wide range of skill bases to help accelerate progress with long-term issues. Surely our current pensions system is crying out for this type of approach – not necessarily from outside the industry as it already contains many talented data scientists, analysts, project managers and radical thinkers –and maybe even a few “weirdos”!
In his booklet Eric Brunet thought the unthinkable by proposing the taxation of all lump sum benefits whether they arose on retirement or death. He argued that by levelling out the tax treatment the need for restrictions on the level of benefit could be removed altogether. He went onto say “It would be possible to dismantle the whole structure of Treasury control of pension schemes, and to concentrate on social objectives”.
His radical taxation proposals may not be appropriate today, but I believe that focussing on the social objectives is essential. For example the way in which successive governments have kicked the long term care issues into the long grass is disgraceful – especially given the longevity trends mentioned above.
My hope is that this decade will see a fundamental reform and simplification of our pensions taxation system alongside a solution to the social care problems – complementing the achievements of the Pensions Commission reforms in other areas.
Sadly I have a feeling that, if I’m fortunate enough still to be around in ten years’ time, it’s more likely that I’ll be repeating the old maxim “plus ca change, plus c’est la meme chose.”
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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