Government rules out imminent major pension reform

Hannah Godfrey writes

AJ Bell staff portraits. For use only by AJ Bell. No other uses permitted.

A letter from the Treasury to AJ Bell appears to rule out any major reforms of the UK’s pension tax framework over the next few years, explaining “now is not the right time” for significant changes.

Last month, AJ Bell chief executive Andy Bell (pictured) wrote to pensions minister Richard Harrington to urge UK policymakers to take a more measured, long-term approach to pensions tax policy centred around an independent review of the pensions system.

On 2 March, in response to his letter, Treasury financial secretary Jane Ellison wrote: “As you are aware, an extensive consultation was conducted last year which considered changes to the pensions tax framework. This concluded that now is not the right time to undertake significant reform.

“Given this, the government does not think it is necessary to convene an independent pensions commission at this time.”

‘No significant changes before 2018’

Although the government has said it will persevere with its cut to the money purchase annual allowance, AJ Bell said its latest comments ruled out any fundamental reform, such as a move to a flat rate of pension tax relief or a pension system more closely aligned to individual savings accounts.

With the Budget moving to the Autumn as of this year, AJ Bell suggested it was now highly unlikely there would be any discussion of significant pension changes until at least Autumn 2018.

The pension provider also argued that, with the Brexit process likely to dominate time, thinking and resources for the next two years, there would be no major reform until 2019 or, more likely, until the next Parliament, given the government is unlikely to make radical changes in the lead up to a general election.

Bell said the pensions tax relief “piggy bank” has constantly been the subject of “feverish speculation” before Budget statements, which has served to undermine people’s confidence in the pensions system and added to the perception pensions are “difficult”.

“Hopefully the Treasury’s response to us gives people some comfort it will not subject pensions to more unnecessary uncertainty – at least during this Parliament,” he added. “If the government does turn its attention back to higher-rate pensions tax relief, it will seriously undermine its credibility.”

‘Smaller changes on cards’  

Having been pensions minister in the past, Royal London director of policy Sir Steve Webb agreed major changes were unlikely in the near future, although he cautioned against ruling out minor alterations to pension taxation.

“The letter obviously doesn’t rule out other changes, such as ‘salami slicing’ or more cuts on the annual allowance and the lifetime allowance – that’s still completely on the table,” said Webb.

“Really the letter is a re-statement of the existing position. Having said that, I don’t think radical reform is on the cards. Just look at the U-turn on self-employed National Insurance contributions, which was a tiny change – a few quid a week for most people – and they backed off within hours.

“The idea the government would turn pension tax relief upside down, have huge losses for high earners, abolish tax relief. and so on – with a majority of 12 and other things to worry about I just don’t buy it. But smaller changes are absolutely still on the cards.”

Last year, in another letter to the Chancellor and the pensions minister, Andy Bell called for the creation of a non-political review body to evaluate pension savings incentives in the UK.