On 4 June 2019, the Financial Conduct Authority (FCA) released its new regulatory framework for peer-to-peer lending (P2P); a Policy Statement known as PS19/14. As you might imagine, it's a document which, following a three-month consultation, is a hefty read of no fewer than 102 pages.
Pension tax breaks: A time for steady hands
For savers and pensioners, it’s certainly been a ‘mixed’ couple of years. Derisory rates on savings and annuities have largely underscored the misery of the last decade, while political meddling has seen a raft of changes introduced in recent times which have not only further complicated an already-complicated system, but also eroded our trust that any new policy will be enduring.
However, it’s also fair to say that not all recent changes have been negative. Many would argue that the so-called pensions freedom was a force for good, while the incoming auto-enrolment scheme has been widely hailed too.
But this week things took another frustrating turn. Those already locked into annuities prior to the launch of George Osborne’s pensions freedom last year were advised that they’d be able to sell these in exchange for a lump-sum pay out. However, this option appears to be no more, while all savers will have had their ears pricked by the news that tax relief on pension contributions could be reduced – perhaps even dramatically.
The future of tax relief
Currently, those saving into a pension do not pay income tax on these contributions. It means that, for a basic-rate taxpayer, they are effectively paying 80p for £1 put into their pension, while for higher-rate taxpayers this figure drops to an even more-favourable 60p. Such tax relief costs HM Treasury in the region of £34billion per year, with pensioners then only paying tax on withdrawals in retirement.
With balancing fiscal targets in mind, it would seem that this tax relief, an idea first originated under the Finance Act of 1921, could be set to undergo change. A consultation on ‘simplifying’ pension tax relief was launched last year, with the introduction of a flat rate of pension tax relief among the more popular schools of thought.
Should such a system come into place, a flat rate in the region 30 per cent is widely expected, which would be great news for basic-rate taxpayers, giving them a boost of 10p in the pound. Given that this sector constitutes over 80 per cent of the taxpaying public, it would be hard to begrudge them this benefit.
But higher and additional-rate taxpayers would lose out considerably if this were to happen. Worse still, such a drastic change to a century-old ideal would also leave the figure of 30 per cent exposed to future tinkering should the Treasury ever wish to skim more off the top, and thus would further undermine faith in the overall pension system.
Perhaps the most radical proposal under consideration is one in which for every £1 contributed to a pension, Government would top this up with £1, less the individual’s age. This would clearly give young savers, particularly those paying tax at the basic rate, a significant boost. However, it would hurt those of an older disposition – particularly those in higher tax brackets.
One of the other ideas previously mooted was for a so-called Pensions ISA, and many believe that this idea is still on the table. Turning pensions into ISAs would mean that the benefit of tax relief on earnings would be ‘exchanged’ for that upon withdrawals, which are not taxable under ISA regulations. However, this apparently simple solution would also be open to political tinkering. Who’s to say a future Government won’t slap a tax charge on withdrawals in future? Added to that, it could also discourage people from saving, given the loss of upfront benefit. Furthermore, if tax-free withdrawals were to endure, it could see people taking out irresponsibly large amounts of money right away, rather than making their pennies last for their whole retirement.
The Lifetime ISA, which is launching next year, was presented as an analogous alternative, with the added perk of a Government top up on contributions. However, this option has similar weaknesses, along with large penalties for early withdrawals and uncapped charges from providers. That’s not to say the Lifetime ISA should be roundly discarded; merely given careful thought if used as a substitute for a pension.
A time for cool heads
A change in personnel at the head of Government will inevitably bring with it a whole new set of agendas, and pensions, given their level of complexity and cost to the Treasury, are always going to be a soft target. However, this is surely not a time for seismic shifts.
The phrase ‘if it ain’t broke, don’t fix it’ isn’t applicable here. After all, there is clearly scope for improvement, and there are plenty of holes one could poke in the current pension system. But surely the biggest one of all is a lack of credibility. Faith among savers in any new policy is rapidly diminishing, as the prospect of the goal posts being moved once again seems to be a matter of course these days.
So, with appetite for change among savers largely negligible, let’s hope that the current course remains steady for now, setting an example of consistency and stability in the pension system for future Governments, and with subtle enhancements – rather than radical changes – at the top of the agenda.
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