Labour is calling for tax relief for higher rate taxpayers to be capped reports Ceri Jones financial journalist
Labour leader Ed Miliband, in a speech at Eastpoint in Southampton in April where he was campaigning for control of the city council, called for pension relief for higher rate tax payers to be capped at 26%, with the extra revenue used to fund reverse cuts in tax credits set out in the Budget.
"On Monday I was in Salford and I met a woman who said she was close to despair," Mr Miliband said. "She employed parents working 16 hours a week, who from tomorrow will lose over £3,000 pounds in tax credits, making them better off on benefits than in work. Why? Because the government is taking away working tax credits for everyone who worked less than 24 hours a week. We say reverse the £1.6bn pensions tax break that the government has given to those earning above £150,000 a year and use the money to reverse some of the cuts in tax credits. I think that’s what Britain would look like if we really were all in it together."
Last month, Shadow Chancellor Ed Balls said that the Coalition’s decision to reduce the annual allowance from £255,000 to £50,000, instead of cutting relief for those earning over £150,000 to 20% (the previous Labour administration’s plan), meant that top rate tax payers will receive a handout of £1.6bn. He said capping pensions contributions by top rate payers to 26% would reverse that sum.
The figures have been doubted by Standard Life head of pensions policy John Lawson who says Mr Balls’ estimated savings of £4bn (compared with the £2.4bn associated with Labour’s original plans) do not account for government, employer, employee and pension scheme costs totalling between £2–3bn.
Cabinet Office minister Francis Maude has engineered reforms that will boost the pensions of senior politicians, himself included, by an extra £314 in each year of their retirement.
Under Mr Maude’s initiative, Cabinet ministers must contribute an extra 2.4%, or £229, more towards their final salary scheme than ordinary MPs. Over 20 years, that will mean an additional £6,280 for former Cabinet ministers, who already accumulate an average £731,000 retirement pot.
Tory MP Mark Reckless said: "The Prime Minister and Chancellor are keen for those with the broadest shoulders to make bigger sacrifices so as to lighten the load for those who are paid less. However, there is a different approach nearer home."
Lots of rumbles about Nest restrictions this month, following the recommendation of the House of Commons’ Work and Pensions Select Committee last month to lift Nest’s contribution cap and the pension transfer ban as "a matter of urgency".
Most commentators agree this would help reduce the number of small pots in existence which are neither economic to administer, nor helpful for employee engagement with pensions. Shadow pensions minister Gregg McClymont adds that the restrictions on Nest have already achieved their desired aim of shaping a low cost arrangement for lower earners and so could now be removed.
Nest, set up with a £650m loan from the government, will start operating in October and the restrictions are currently scheduled for review in 2017.
The contribution cap of £4,200 means high earners cannot use the scheme so many employers will run two pension schemes, increasing complexity and costs, while the ban on transfers will stop savers consolidating small pots into Nest, which according to the Committee is the "obvious choice" for the role.
The Association of British Insurers has lobbied for Nest’s annual contributions to remain capped.
One possible hurdle was that state aid demanded a restrictive mandate but this is not the case, according to pensions minister Steve Webb who told the committee in January that restrictions were "not integral" to the rules governing European state aid.
Meanwhile rivals such as B&CE are complaining that the playing field would not be level if the restrictions are lifted as Nest enjoys government support and is already moving beyond its brief to target small savers as pressure mounts on it to win business. Firms with fewer than 50 employees will now be able to delay auto-enrolment until beyond June 2015, making 1.3m firms which can do nothing for 14 months later than planned. Meanwhile Nest is already up and running and its borrowing from the Department for Work and Pensions (DWP) reached £120m last year.
Nest’s position is that the restrictions are damaging saving per se and add complexity and cost. It maintains it is there to cater for employees with low earnings, not necessarily small businesses, but it has a public service obligation to accept any size of employer.
Patrick Heath-Lay, director of finance and customer development at B&CE Benefit Schemes, which traditionally has provided pensions to the construction industry but plans to open up its offering to a broader market, says Nest is targeting large employers even though a review in 2010 decided Nest would focus on the smaller employers.
"If Nest comes in to our market, backed by a government loan, and then has the restrictions lifted, it will be difficult to compete against," Mr Heath-Lay says. "Why were the restrictions put there in the first place? It was to keep them in their target market."
Allowing easier transfers between pension schemes would benefit at least 200,000 people, according to a new study carried out by the Institute for Fiscal Studies (IFS) against the backdrop of a consultation by the Department for Work and Pensions (DWP)on simplifying the transfer of small pension pots. Moreover, the definition of trivial should be raised dramatically to encourage engagement with the pensions concept, according to Steve Watson, head of DC, Alexander Forbes Consultants & Actuaries.
The IFS research found there is currently around £400m in UK pension pots worth less than £2,000 and around half of the people who hold one of these small pots have at least one other pension pot but have failed to combine them.
"We believe that the focus on pots with a value of £2,000 or less is too low," says Mr Watson. "Anecdotally, there is a link between inertia and value – the higher the value the more likely the investor is going to be ‘actively’ involved. One pot with a higher value is more likely to get attention than a number of smaller pots. Our own experience would show that in general, inertia still prevails at £16,000, so £2,000 is way off the mark. To stop the problem becoming bigger, we suggest that at least for group personal pension plans, where an employer decides to move provider and the new scheme is more cost effective, there is an automatic transfer process."
Pensions minister Steve Webb has said that he would welcome reform to facilitate transfers and that in the future considerably more people than the 200,000 impacted now would benefit as auto-enrolment commences.
One side effect of all the pre-Budget speculation about reducing tax relief for higher rate payers is that it has drawn attention to the numbers of employees not claiming back their higher relief. Some 425,000 Britons are currently failing to claim tax back on their pension contributions, estimated to be around £850m every year. Small wonder the Chancellor passed on that measure!
Means testing fiasco
Over a million people are not receiving the Pension Credit they are entitled to, according to Steve Webb.
Mass means testing has failed pensioners, with only an 8.6% increase in the number of people being paid Pension Credit to show for millions spent on trying to increase the take up.
New research from the DWP shows that its strategy of using automatic payments to encourage poorer pensioners to claim Pension Credit has had little impact on the numbers who then go on to do so.
The DWP targeted those eligible for Pension Credit and started to automatically pay them the benefits for 12 weeks. But Mr Webb says that most of the selected group did not make any further claims despite the initial automatic payments. Many people still believed they were not eligible for the payments, regardless of the trial period
PPF to conduct own checks on contingent assets
One interesting loophole has been closed by the Pension Protection Fund (PPF), which has clarified how it will in future go about its assessment of guarantor strength on trustee certified type A contingent assets.
From 2012/13, the strength of type A guarantors will be subject to the PPF’s own assessment as well as the trustees’ certification. There has been concern that guarantors have been put forward with favourable failure scores, by virtue of having little or no service history, in the knowledge that some would not pass muster in the event of being called in.
The PPF’s latest guidance on this, Contingent Asset Surgery Note, says: “The PPF will not just rely on the trustee certification and the D&B score, but will use other publicly available information to assess whether to give credit for the guarantee.” There is clearly a risk that the trustees could submit a guarantee, in line with the guidance, only to find it is subsequently rejected because it fails the PPF’s own tests, with the result that a much higher PPF levy could become payable.
The PPF suggests that trustees who want to be more certain that the PPF will give credit for the guarantee when calculating the levy should assemble more detailed advice on the calculation the PPF and information to support their stance, and also they should consider certifying a lower amount than the guarantee where the evidence is not strong.
Author: Ceri JonesCeri Jones has been writing about pensions for 25 years, first editing Pensions & Employee Benefits magazine and subsequently the FT's Pensions Management magazine in the mid-1980s.