Politics and pensions – a warning from Europe

George Osborne might not spend a lot of time following Germany’s local politics, but perhaps he should. Local authorities in Germany threatened to withhold municipal services from energy firm RWE, because the company said it would scrap its dividend this year, which was not a popular move among the public sector pension funds that rely on those dividend payments. This week’s UK Budget may include a boost for joint local government pension funds in the UK, which will be under pressure to buy shares that pay out well enough to meet the increasing demands of councils’ huge pension obligations. As those funds face growing pressure from councillors and, inevitably, MPs to prop up public pensions, firms selling shares to public sector investors will be exposed to a new and under-appreciated political and commercial risk.

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Lesley Harrold | 17.03.2016 15:54:53

In the private pension sphere, it is unlikely that the Budget 2016 is the end of the pensions tax relief saga. The new Lifetime ISA will run alongside the current pensions tax regime, with no interaction between the two systems. Contributions to the Lifetime ISA do not affect the lifetime (LTA) or annual allowances (AA) for pensions tax relief. Auto-enrolment is also unaffected and continues as before, and those saving in a Lifetime ISA from 2017 will also make contributions under auto-enrolment (unless they have opted-out of the latter).

The existing pensions tax relief system remains complex and the reductions in the LTA and AA announced last year, along with the new tapered annual allowance, will be implemented with effect from 6 April 2016.

Those examining the Chancellor’s speech closely will note he commented that now is not the right time for a change [in pensions tax relief]. What he did not say was that there would be no future changes. It is clear that the Government is treading carefully in the run-up to the referendum on the Brexit question, and it could well be the case that pensions tax relief reform is back on the table at a later date.

The introduction of the Lifetime ISA does not address the question of the “unfair” distribution of tax relief between basic and higher rate taxpayers. The possibility of a new “pensions-ISA” could resurface if, in due course, the Lifetime ISA is heralded a success once it is up and running. However, by that time the Brexit question will have been answered, the 2020 general election will then be on the horizon, and the Chancellor would need to tread carefully if he was then minded to introduce a pensions ISA and a taxed-exempt-exempt (TEE) system.

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