There has been a growing expectation that in order to fill the COVID sized hole in the Treasury's finances focus and ultimately action would be brought to bear on pension tax relief across defined benefit and defined contribution pension schemes.
However, "Tax Day" has seen cuts to higher rate tax relief fail to materialise. The focus of the Treasury's announcement and changes has been limited to technical issues around: - public service schemes and the age discrimination issues raised by the McCloud case as well as issues with the tax regime highlighted by the remedy; the appropriate tax treatment for defined benefit superfunds (defined contribution consolidators) given the green light to start transacting by the Pensions Regulator in autumn 2020; and expansion of the Dormant Assets Scheme (the industry led and government backed scheme to reunite people with their financial assets) to include assets from the pension sector. These are all important but with relatively limited impact. No changes to the fundamentals of the pensions tax regime have been announced or flagged.
While the nation's savers and investors may be happy with the situation of largely "no change" we do not believe that future material tax changes to the pension’s taxation regime are in any way off the table. It would have been surprising had there been major changes given the situation with the pandemic; there was a palpable sense that the introduction of complex changes now would have been negatively viewed as bad timing.
The industry remains expectant that at some point there could be a move to flat rate relief on pension savings, with higher and additional rate taxpayer relief cut and a possible increase in base rate taxpayer relief. The thinking would be to encourage savings amongst the wider group anticipating the disincentivising effect such changes are likely to have on higher earners who will most likely save less in pension vehicles, diversifying into other investments such as ISSAs and property. Generally more incentives to save into private pensions are needed not less for the whole workforce but an adjustment to tax relief on pensions of this type would generate much needed billions for the Treasury.
The introduction of uncertainty for millions of older individuals continues, it would seem, to be a factor in the survival of the “triple lock” in relation to state pensions, on which many depend and will depend in the future.
Some changes irrespective of the difficult situation caused by COVID-19 would have nonetheless been welcome. Action to deal with non-taxpayers or low earners, those who earn less than the income tax personal allowance, who do not get tax relief on their pension savings automatically applied in a net pay employer scheme, (contributions to pensions being deducted from nontaxed gross pay), would have been welcome. Many in this category are unaware that they are not getting this tax relief. Government action on this is however still anticipated.
So, a quiet “Tax Day” in pension terms with more seismic shifts almost certainly on the horizon.