John Moret: Is the pensions onion about to get even bigger?

Rumours are rife of potential changes to the tax-privileged status of pension schemes as part of the Budget and its objective of filling some of the alleged £22bn black hole in public finances.

I have no idea whether these rumours have substance but I do have concerns over any changes to pensions tax, tax relief and related legislation relief.

I think back to 2010 and the new government at that time, which, in a discussion document, said reform of pensions tax relief was “a necessary part of its commitment to tackling the fiscal deficit”.

In that discussion document, it put forward a range of options, including:

• Redesign and the application of the annual allowance
• Different methods for valuing defined benefit (DB) contributions
• The appropriate level for the lifetime allowance (LTA)
• The rate of tax relief for additional-rate payers

We all know what then happened – the annual allowance was dramatically reduced, along with a reduction in the LTA, the complexities increased, compounded by the introduction of pension freedoms in 2015 and the tapering of the annual allowance from 2016 and, recently, further chaos with the abolition of the LTA.

Today’s pensions legislative and taxation landscape has become ridiculously and unnecessarily complicated

I suspect the new government will be grappling with the above options, apart from the LTA and maybe some other ideas. We will soon find out. However, my concerns are not just about the likely negative impact of any such changes on pensions savers and savings but more about the potential for more legislative complexity as any changes are implemented.

Shortly before the new government was elected, I came up with a short list of pensions-related suggestions for an incoming government to consider.

Top of my list was pensions simplification. It is now over 20 years since the then-Labour government set out its proposals for simplifying the taxation of pensions. These proposals were enacted in April 2006 – ‘A Day’ as it was known.

It was suggested pensions tax simplification would:

• Improve choice and flexibility for providers, employers and individual savers
• Improve competition among pension providers
• Encourage individuals to save for retirement
• Reduce administration and compliance costs for employers, administrators, providers and advisers

Those were all laudable objectives but, unfortunately, they have all been lost in the mists of time. Today’s pensions legislative and taxation landscape has become ridiculously and unnecessarily complicated.

I advocate one pensions regulator for all DC pensions and one ombudsman to deal with all complaints

There is no prospect of increasing consumer engagement with pensions while the current complexities remain or, worse still, increase.

My fear is that further tampering with the pensions tax regime will simply add further layers to the pensions “onion” – the skin of which is now almost impenetrable.

The government has recently announced a Pensions Investment Review, with the aim of boosting investment, increasing saver returns and tackling waste in the pensions system.

The focus is almost entirely on workplace defined contribution (DC) pensions, examining primarily scale and consolidation, costs versus value and alternative investment strategies to boost UK growth.

In parallel with this review, it should invite proposals and submissions on how we can produce a radically simplified tax regime for DC pensions. I would ignore DB pensions for the purpose of this exercise.

Shortly before the new government was elected, I came up with a short list of suggestions for an incoming government. Top of my list was pensions simplification

All parts of the pension savings lifespan would need to be considered, including decumulation, with the aim of removing as many anomalies or other historical quirks, such as the artificial age 75 death benefit threshold and the multiple drawdown structures that currently hinder post-retirement planning.

There is scope to take a considerable element of cost out of the operations of DC pensions with a new simplified regime to the benefit of all DC pension savers. I shudder to think of the actual cost of monitoring, administering and advising on pensions under the current regime when one takes into account all those involved, even allowing for the potential positive impact of AI and associated technologies.

There are plenty of industry experts who could help in designing a simplified regime, rather than leaving it to civil servants. Once completed and accepted, this team of experts could then consider potential simplification of a separate DB regime and the trickier cross-border issues such as pensions transfers.

There is a lot more that could and should be done to improve the pensions landscape. For example, I advocate one pensions regulator for all DC pensions, regardless of whether they are workplace or individual arrangements, and, similarly, one ombudsman to deal with all complaints and one compensation regime. These regulatory changes would go hand in hand with the simplification proposal.

Is this all possible? Yes. Is it likely? No. Sadly, adapting the title of the song made famous by Marvin Gaye and Tammi Terrell, “the pensions world is just a great big onion” that threatens to get even bigger. I doubt the remedy suggested in the song of planting love seeds is likely to be effective in producing a simpler pensions world!

John Moret is principal at MoretoSipps