Emma Wall: Hello and welcome to the Morningstar Series 'Ask the Expert'. I'm Emma Wall and I am joined today by Julian Webb, Head of Workplace Savings with Fidelity.
Hi, Julian.
Julian Webb: Hi, Emma.
Wall: So tax relief on pensions is changing. Before we get into the changes let's talk about what is available to people now.
Webb: Okay, so the principle of saving for your retirement is that you receive tax relief on the way in. You receive tax relief on your investments and then you pay tax on your marginal rate, when the actual pension income is paid to you.
Wall: So that then means that if you are basic rate tax payer and you put an 80p you get 20p on top of that and if you have any dividends that get reinvested, you don’t pay capital gains tax, you don’t pay income tax. It's all safe within that wrapper.
Webb: That's right and that’s been the system that we've had for many, many years. And in fact it’s the global system. So it’s a system that most pension savers are incentivised with. And as you said this may be changing because the Government have issued this consultation paper to ask the industry and employers, and indeed you and I as investors in pensions, what our views are in terms of how we should be incentivised to save for our retirement.
Wall: It does sound a bit mean to change it. As you say it's been a system that’s been there for a while, it the global system, and several government initiatives in recent years have been encouraging us to save for our retirement…things like auto-enrolment. So why now, why are they proposing these changes?
Webb: I think the key driver behind this is that the Treasury have identified a large amount of money is invested in terms of pensions tax rate, some £35 billion a year, which is equivalent to 8p on the basic rate of tax. So it’s a big investment that the Government are making. So I think understandably they are reviewing this to say well, actually is it working as well as it should? So I would say, actually, that they seem to be quite genuine when they say – this is the Treasury – that in the consultation it is wide open, including the status quo. So it may not change although I think it's highly likely that there will be some form of change.
Wall: And obviously we don’t know what the review is going to conclude. But do we know some of the things that are potentials on the table?
Webb: So one is status quo—so no change at all. I think another one would be the continuation of reducing the tax relief for high earners. We've already seen the Government move in that direction over recent years and in fact they have gone even further more recently, particularly for those that earn over £150,000 where their benefits will be tapered down to just £10,000 a year. So a big, big change for the high earners. I think another one that is potentially under consideration is the harmonisation of the percentage of tax relief. So as you said earlier 20 pence in the pound for standard rate tax payers; 40 pence in the pound for higher rate tax payers. So there is some discussion about whether that should be equalised to, say, 30 pence in the pound.
And probably the more radical one that’s being discussed at the moment is whether actually the principle of tax relief on the way in and then tax relief on investments and then being taxed on the way out should actually be reversed. So pensions would become like ISAs. So you pay into the product after you have paid tax and then you receive tax accumulation free and then you effectively have the proceeds free of tax. So potentially pensions could work like ISAs from a tax relief perspective.
Wall: From an investor’s point of view it seems that pensions are forever being tinkered with. We've had allowances both life time and annual allowances tinkered with, relief is now potentially being changed. I mean, do you not think that this makes some investors just think, oh you know what I am not going to bother.
Webb: You are right there have been huge amounts of change and I think what we have got to be very careful about is not to undermine the confidence in pensions. I think auto-enrolment has been a great success. I think confidence is back into pensions and pension savings. There has been lot of simplification that has occurred. So a fundamental wholesale change would have to be worked through very, very carefully not to undermine people's confidence in pensions. Because we need more people to save more for their retirement, not for them to be disenfranchised and opt out of pensions.
Wall: With that in mind are there any action points from this review? Obviously we don’t know what the conclusion is going to be, so should people just carry on diligently paying into their workplace pension, and their SIPP as well if they can afford it?
Webb: Absolutely. So there is tax relief available today. Hopefully that will continue to be a key incentive for people to save for their retirement. So what I would say is that if you can access additional contributions from your employer, so for example a matched contribution, you should absolutely consider taking advantage of that. And just generally trying to pay into your pension at the highest rate that you can afford.
Wall: Julian, thank you very much.
Webb: Pleasure. Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
