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CA Summit: Tax regimes for DC and DB could diverge – Webb

01 October 2020
Age discrimination case could leave millions needing costly advice – Webb
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Future pension reform could see further divergence between DC and DB pension regimes, with a reduction in higher rate tax relief on DC pensions only, but greater flexibility in regards to access. 

These were the conclusions of former pensions minister, Steve Webb, now a partner at pensions consultant LCP.

Talking at the Corporate Adviser pension summit Webb says he wasn’t surprised that the government had cancelled the budget, and with it the opportunity to look at more widespread pension tax reform. 

He described speculation that the government would ditch higher rate tax relief this Autumn, in a bid to reduce spending in light of the Covid crisis as “nonsense”. 

Webb said that previous chancellors such as George Osborne had looked at reform of this tax relief, but even after lengthy consideration had left it alone. 

“There is simply not enough bandwidth within government for them to be looking at this issue at present in the detail it needs,” he says. Given the health and economic impact of Covid and with Brexit on the horizon any plans are likely to be parked for at least a year. 

James Dowling, public affairs and public policy lead at Lansons Communications, and a former political special advisers says one of the main barriers to a widespread shake up is public sector DB pensions. Given the chancellor recently increased tax relief available to higher paid NHS doctors a claw back looked unlikely in the near future he said.

Looking ahead Webb says that reform could take a middle ground between a full-scale rethink of tax relief across both DB and DC, and further “cheese paring” of the current tax rules.

He says he would not be surprised if DB and DC regulation diverges further, with basic rate tax relief given on DC pensions only. He says if the government wants to be more creative this gives them the opportunity to remove the link to marginal tax rates and introduce a 30 per cent tax rate, for example, or a matching scheme which would benefit those on lower salaries more. 

It could also address the net pay anomaly – which he said was a priority for pension reform.

Webb says that pension freedoms had made DC pension saving more attractive to many and he would like to see this extended with savers being able to withdraw 25 per cent of their fund tax free at an earlier age. 

“This would have the benefit of helping those who are younger an in financial hardship. This money is typically taken out of the pension anyway at a later stage,” he says.

However Dowling said he would be less keen to see measures introduced allowing people to access pension savings earlier.

Both were supportive of initiatives for a ‘pot follows member’ approach to be adopted, when it comes dealing with the problem of legacy small pots within the AE system. 

However Webb said he was not confident that the DWP working group, which was recently set up, would resolve this issue, saying it was more likely it would suggest “incremental changes” rather than wholesale reform of the current system. 

He adds: “It is unrealistic to ask disengaged savers with multiple small pension pots to sort out this issue.” There system has created this problem he says, and there should be more automated mechanisms in place to help resolve it. 

“No solution is perfect but the ‘pot follows member’ approach – with appropriate opt outs for those that want it – seems to be the least worst option.” 

The post CA Summit: Tax regimes for DC and DB could diverge – Webb appeared first on Corporate Adviser.

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