So what are the chances? That’s an interesting question. Some say, or indeed used to say, that the odds on any chancellor doing little more than tinkering with the holy grail of pensions were the same as winning the lottery.
This hasn’t always been the case. Pre-Budget mutterings and murmurings both within and out with the financial services industry have persisted for years, but it has never seemed quite as imperative as it feels today. Time and again, prior to any given budget, we in the pension industry have predicted the chancellor moving in on this potential pot of cash, but have always been wrong.
Reducing, or heaven forbid, abolishing tax relief amounts to an attack on the studious great British saver, the industry and many in the public would cry.
Talking of chances takes us back 15 years to 2005. Gordon Brown was the chancellor and back then tinkered with pensions, to a degree at least. But more interestingly the Italian Lottery had reached fever pitch…
The number 53 had not been seen for a very long time from the Venice draw (they had 10 different draws back then all named after different cities) and surely its time had come.
Italians didn’t have to pick a series of numbers, as we do in the UK, they could opt to bet on a single number coming out and 53 hadn’t come from Venice in over 2 years.
It was estimated that €3.5bn or €227 per family in Italy was spent that year in the run up to 53 finally being drawn on 9 Feb.
People borrowed to place bets, used all their savings, raided the kids piggy banks - some increased their stakes each week, the theory being when it finally came out they recouped their losses. Some even declared personal bankruptcy. In the end, when 53 appeared at last, the nation breathed a sigh of relief that the “bewitchment” had been broken. Nevertheless, during all this madness, because of their losses, 4 people had died.
The fallacy of the above logic - that is if some random event hasn’t happened for a while, then it’s somehow “due” - feels a little like pension tax relief being changed - always a possibility, but up to now, never an event.
However, that could all be about to change.
COVID-19 is going to cause the worst economic slump in a generation, despite all the worthy and well intentioned intervention and support programmes.
Although Governments both domestically and abroad have never been better placed to tackle the situation with fiscal props riding on the back of absurdly low borrowing interest rates, it is still going to take Mr Sunak to balance the books somehow.
We already know that self-employed tax rates are changing to bring them more in line with the employed - the price to be paid for their own crisis bailout schemes, but with the payback lasting a lot longer and no doubt amounting to a lot more.
Thinking about tax and pensions, it is relatively common knowledge that tax relief on pensions is available and a “good thing”. Few however actually understand the complexities (aside from accountants, payroll software algorithms and we at Gallagher) and with a healthy proportion of higher rate tax payers not even claiming the full relief they are due each year, the chances of this particular ball finally making an appearance at this Autumns budget are higher than ever before.
If we are all to share the burden of the eye watering virus support schemes bill, something has to give and the sacred pensions cow is no longer immune.
Sunaks options might include:
- Abolish higher rate relief entirely, leaving all employee contributions to enjoy relief at basic rate only, whatever part of the UK they reside in, but at least 20%
- Introduce a flat 25% or 30% rate of tax relief for all
- Adopt the Lifetime ISA model of a 25% top up each year, with many strings attached of course.
If any of these or the like come to pass, I predict an outcry, but not a riot and any protestations would quickly fade in the face of rising unemployment figures and a bruised NHS.
So maybe now the odds on a ‘Rishi raid’ on the pension pots of UK workers is indeed more likely than any of us winning the lottery. We will have to wait and see.
In the meantime, what to do?
We have, for many years, said that companies need to keep on top of pension and tax structures, however dry the subject might be, to make sure they operate in the most tax efficient and effective way for them and their staff.
With this in mind, it’s also worth noting that any change to tax rates or reliefs would impact the benefit to the employee and should therefore naturally trigger a review of your overall benefit strategy. Further, thinking about why the pension scheme is there in the first place, if you want to help your employees get into the position of actually being able to stop work, the wider subject of Financial Awareness and Wellbeing would be really worth considering and adding to the agenda.
If you want to discuss this, have the subject demystified or indeed touch on any aspect of the above topics, do get in touch with your local Gallagher consultant.
Having said all that, if anyone has any tips for this weekend’s winning lottery numbers, do share.