Whilst it is unlikely that government or opposition will take the complete package of measures in the Resolution Foundation report and implement them all, political parties do have a habit of ‘cherry-picking’ ideas from such reports and including them as party policy.
Royal London has analysed the key proposals contained in the report to assess the potential impact on pensions and pensioners. These are:
- Big changes to pension tax relief – ‘flat rate’ tax relief on contributions at 28%, and a new cap of £40,000 on the size of tax free lump sums taken at retirement; allow relief on employee National Insurance Contributions for pension contributions (but see below);
- Extension of National Insurance Contributions to the earnings and occupational pensions of those above state pension age – the report implies the full rate of 12% would apply to earnings and a reduced rate of 6% to the occupational pensions of those on higher incomes;
- More generous indexation of the flat rate state pension in the short term, financed by a squeeze on those with the largest entitlements under the new state pension system;
- Make businesses who contract with the self-employed pay “employer” pension contributions into the pensions of the self-employed;
- Expand the scope of automatic enrolment by enrolling workers on more than £6,000 per year and level up employer pension contributions to match those of employees;
In addition, the report supports the development of ‘collective’ Defined Contribution schemes and favours greater use of ‘defaults’ in retirement income products.
Initial analysis of these proposals suggests a number of key issues and concerns which would be raised:
- Taken together, the package would add greatly to the complexity of the pension system; in particular, implementing a flat rate of tax relief on employer and employee pension contributions would cause real challenges for Defined Benefit schemes; similarly, a new rate of National Insurance Contributions on occupational pensions, but applying on a different band of earnings to other NICs would make things more complex for pensioners and pension providers who would have to collect the charge;
- The package includes a number of retrospective changes to the pension rights which people have already built up and to the rules on which they will have based their financial plans; for example
- a £40,000 cap on tax free lump sums could have a significant impact on the financial plans of those with larger DC pension pots, including those who have undertaken DB to DC transfers;
- The proposal to freeze an element of the state pension system (the ‘protected payment’ element of the new state pension) would penalise those who had been extensively contracted in and built up relatively large SERPS pension rights; this group is already at a relative disadvantage from the move to the new state pension, and such a change would further disadvantage them;
- Applying NICs to occupational pensions in payment would leave pensioners with a significantly reduced disposable income; for those close to retirement it would be too late to save more to make up for this shortfall;
- The changes would add significant additional costs to employers. This would include a higher mandatory rate of contributions under automatic enrolment (levelling up from 3% to 5%), the loss of higher rate tax relief on employer contributions into workplace pensions, a duty to enrol workers earning between £6,000 and £10,000 into pensions and a duty to make pension contributions when using the services of the self-employed;
Commenting, Steve Webb, Director of Policy at Royal London said:
"Political parties have a tendency to ‘cherry pick’ policy proposals from reports of this nature, so we may find that some of the ideas in this report find their way into policy sooner or later. Taken as a package, these proposals would add considerably to the overall complexity of the pension system, would involve some unfair retrospection on those close to retirement and substantially increase the pensions burden on employers, including those struggling to fund legacy defined benefit pension schemes. Whilst a number of these proposals are well meaning and could be refined, the package as a whole would not be good news for the pension system."
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