By David Brooks, Technical Director at Broadstone
I should rest easy though. Pensions are state mandated tax avoidance (planning may be the better word, or even tax deferral).
Tax relief is given (by and large) relative to the salary forgone in pension contributions. Salary sacrifice goes one step further and is state mandated national insurance relief. Pensions are a brilliant way of avoiding tax and truly are available to all that wish to use them. The headlines, and not just the personal finance ones, should be screaming about these onshore tax havens!!
The tax relief is a nudge as part of an agreement between State and person. The Government will let you forgo some tax now in return for locking this up for a long time. This is a benefit for the Government as you’re more likely to be a happier and healthier member of society later in life. However, the nudge unit is looking a bit too subtle, the slowly-slowly-catchy-monkey technique is certainly not always the best. It would be great if everyone did know the advantages of pensions but they don’t and perhaps it is arrogant to expect people to know without being told. They have lives to live, work and responsibilities. After all I didn’t know what an actuary was until I met one (I’ll not comment that I still do not know what they are).
The Government’s narrative over recent times has been the concern whether tax relief is well understood. Perhaps if we had the wall to wall coverage about Panamanian tax trusts that we have seen it would be better understood. Why don’t they increase the financial literacy in schools, via charities like MyBnk to encourage financial planning and the understanding of pensions? Imagine if the Government could find £9m down the back of the DWP’s sofa to write to everyone over the age of 16 to explain the tax advantages available to them for saving in a pension scheme. It could highlight the tax avoidance on the way in via tax relief on contributions. It could explain how investment return is largely free of tax (apart from the 10% tax credit on dividends) which is the same as an ISA (people understand ISAs)! There is no need to declare the fund on your tax return. We’re not done with the benefits of pensions as the eye-grabbing bonus is the 25% tax free element at the end. This has been under threat since
Methuselah bought his annuity yet it perseveres.
Discussions on pensions have to be framed with the potential impact of LISA and her future incarnations (I still think MISA is a good name for a savings product - pronounced Miser; it’s never good when you have to explain the joke). If we could build on the success of auto-enrolment and demonstrate people do understand and appreciate tax relief we could avoid the creep of LISA, which is sure to happen. With a few simple steps LISA would become our future pensions system.
1. Reduce further the Annual Allowance
2. Increase the LISA contribution limit (and perhaps the value of the top-up)
3. Remove or amend some of the age limits for new contributions and the top-up
4. Allow employer’s to pay into it as part of AE structure
5. Rename it a PISA (the government have also got rid of tax free cash)
So, let’s pass the information on the benefits in pensions and their tax avoiding powers along the corridor to the “shout it from the roof tops” unit. Yes complex offshore trusts (?) may be opaque and out of reach for many of us. However, those moaning about the wealthy individual’s use of these things probably aren’t even using their Annual Allowance or ISA allowances as much as they could. The Government wants you to save and will let you off some tax to do so. The Government will allow you to plan for your death (again pensions have a tax privileged position) and is also set to greatly increase the IHT limits which is a dramatic giveaway in itself.
Pension and Investment professionals should be shouting the tax advantages of the products we work with from the rooftops. There is a lot more tax relief on the table for people to get. So take it out of their pocket and secure it for yourself.
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Calls on the PPF and TPR’s oversight
Two high profile pension schemes appear to be on a collision course with the Pension Protection Fund. BHS Pension Scheme and British Steel Pension Scheme. Both are high profile brands well known to the general public and would cause a major splash in the PPF’s growing pond. What happens and how it happens will be a major test of the regulatory framework established over the past 11 years by the Pensions Regulator. The restructuring of corporate finances to allow a business to continue absent of its pension liabilities seems to be too easy. Has the pendulum swung too far towards the employer at the expense of member’s benefits? The legal action that may follow BHS Pension Scheme, for example, seems an expensive move but is it too little too late. Where was the monitoring of these failing employers years ago? There may be legitimate answers to these questions but are they being asked?
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