Connected Research

Union policy research in the 21st century

NAPF calls for budget for pensions

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The National Association of Pension Funds has today called for a budget for pensions (press release; full submission) which addresses a couple of its long-running campaigns: firstly on the need for the government to increase the supply of long-dated and indexed gilts (which these pages have supported); as well as a call for the re-structuring of the last Budget’s intention to taper higher-rate tax relief for those earning above £130,000 (which they haven’t).

Issuing more gilts will help pension schemes and would be a welcome development in the light of the continuing decline in the numbers of people saving in defined benefit schemes, since it is one which would help support those schemes which remain by matching the demand of occupational schemes as well as by reducing the strain on company balance sheets caused by volatility. The NAPF also argues that it is likely to assist the government with a cheap and secure source of finance given the suspension of the quantitative easing programme.

Concerning the higher rate taper, the NAPF has upped the ante a little by drawing up three case studies of people earning as little as £40,000 who may – by an unhappy conjunction of circumstances – be caught by the new rules. I don’t want to get too caught up in these simply because the circumstances for ‘Dave’ themselves – 25% rise in pay following promotion, rise in bonus, car allowance and relocation resulting in the award of a hefty cash allowance – seem to be a little unlikely, not least to members of the Connect Sector of Prospect, but also because they are likely to be worked around in the tax efficiency planning that is likely to apply to individuals in these situations. That includes with respect to redundancy payments, too (and there are a host of consultants just waiting to advise). And because all the situations are one-offs, occurring in one particular year, compared to the regular earnings which is the main target of the taper, I’m not sure they’re terribly helpful, either (other than in illustrating some potential pitfalls).

It remains correct to address the imbalance in tax reliefs earned by this part of the population, as the Chancellor is seeking to do: 1% of the population earn at this level (perhaps more correct to say regularly earn at this level) but they receive 25% of tax relief.

What I was attracted by, however, and thus in isolation from the issue of the taper itself, was the NAPF’s quid pro quo for abandoning it: a reduction in the annual allowance for tax-free pension contributions from £245,000 to a figure between £45,000 and £60,000 (figures which, of course, remain well beyond the means of most ordinary pension savers). Not being a tax expert, I don’t know how this works out in terms of likely tax yield or its spread across taxpayers more generally, both of which are clearly critical, but it does seem an interesting option in terms of exploring how what money is made available by the Treasury for pensions tax relief is fairly distributed. The NAPF, which points out that the figures to work out the likely yield simply aren’t in the public domain, argues that it is likely to achieve savings which are at least as much as it believes the measure will yield in practice – and perhaps as much as the Treasury thinks it will. (Nice work, there!)

I’m not sure how this squares with one of the NAPF’s criticisms of the taper (that high-paid executives will lose interest in good quality pensions if they become disengaged from them) – surely the same argument applies if annual tax relief is limited to a maximum of £45,000-£60,000 in pension contributions. Nevertheless, when there is a need to encourage both scheme sponsors to offer good quality workplace provision and to encourage people that pension schemes are worth having and saving in, not least among the low paid, looking at how available tax reliefs are used and distributed is an important consideration.

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Written by Calvin

25/02/2010 at 5:38 pm

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