Pensions Expert’s roundup of the key figures from the Autumn Budget: the government assumes most people will not claim their net pay tax relief top-up, £10m has been set aside to help administer increasingly complex McCloud tax arrangements, and the Goodwin remedy could end up costing £3bn. However, savings have been made from the double lock and state pension overpayment revisions.
Net pay: Don’t forget to claim
Up to 1.2m people, 75 per cent of whom are women, could be entitled to an average of £53 a year under government plans to make top-up payments to low-paid members of schemes using net pay arrangements from 2024-25.
The aim is to better align outcomes with members of schemes using “relief at source” arrangements.
However, it will be up to individuals to make a claim, and the Policy Costings document released alongside the budget reveals that the government expects to pay out just a quarter — £15m — of the money that members are entitled to.
Putting the onus on individuals to claim a top-up inevitably means that many won’t. The government rightly says there is a lot of uncertainty about take-up, but estimates the cost at £15m a year. This implies that under a quarter of the money available will actually be claimed
David Robbins, Willis Towers Watson
David Robbins, director at Willis Towers Watson, said: “Putting the onus on individuals to claim a top-up inevitably means that many won’t. The government rightly says there is a lot of uncertainty about take-up, but estimates the cost at £15m a year. This implies that under a quarter of the money available will actually be claimed.
“However, employers will be relieved that the government has not gone ahead with earlier proposals to force many schemes to change the way they operate tax relief. This would have involved more complexity and forced many higher rate taxpayers to claim relief that they currently get automatically.”
Another £10m for McCloud
The government introduced a new measure providing a technical update to pensions tax legislation in order to implement the McCloud remedy.
The measure will apply to all individuals affected by the 2015 age discrimination in public service pension schemes and relates to compensation an individual may receive.
Other legislative changes are required to deal with the retrospective nature of the changes being made under the public service pensions and judicial offices bill.
Changes to secondary legislation will be made in order to make any money owed under the McCloud remedy tax exempt, as well as make changes to lifetime allowance and annual allowance rules.
Some 200,000 public servants will have to review their last seven tax years, according to an Isio estimate, each of which may have to be adjusted to account for the McCloud remedy.
HM Revenue & Customs has set aside £2m to deliver IT changes in light of the ruling, and an additional £8.6m to set up and administer compensation scheme application process.
Steve Simkins, partner at Isio, said: “Like Russian dolls, each time you open one issue you find another. Today’s is McCloud and taxation.
“It makes sense for the government to be setting aside over £10m to help solve this problem with new HMRC IT, but as the trailed retrospective tax legislation proves, it’s already becoming too complicated for members to understand. And we still await details of the next Russian doll, which will be the pensions tax compensation scheme.”
£3bn for the Goodwin remedy
The cost of the Goodwin remedy, arising from the disparity in rights to survivors’ benefits in the Teachers’ Pension Scheme but applicable across all public service schemes with similar discrimination built in, has been estimated by the Treasury to be £3bn over 40 years.
If true, this will be substantially less than — specifically, one-fifth of — the McCloud remedy, which has added around £600m a year to the public service pensions forecast in the Economic and Fiscal Outlook published alongside the budget on Wednesday.
However, the Office for Budget Responsibility added that “uncertainty over how the remediation will be implemented means that it has not been possible to reflect the associated costs in this forecast”, though it expects to include it in the next one.
Public service pensions spending revised upwards
Net public service pensions spending has been revised upwards relative to the March 2021 forecast by an average of £3bn a year.
The OBR said the change is “more than explained” by the correction of “a double-counting error” related to adjustments in previous forecasts that were included when resource departmental expenditure limit budgets were raised, increasing the forecast by an average of £3.4bn a year, with higher consumer price index inflation increasing the figure by an average of a further £1.2bn a year.
Regarding the McCloud remedy, the OBR forecasts the current cost of the remedy — £600m a year — to fall to £500m a year by 2026-27, though it adds that these estimates remain “highly uncertain” and are likely to be revised over time
By contrast, funded scheme expenditure was £2bn lower than the March forecast, “and has then been revised down by an average of £1.7bn a year over the forecast”, the OBR said.
It attributed the change to a downwards revision by the Office for National Statistics to the imputed return on assets held by the schemes from 5 per cent to 4 per cent.
“We have also revised down our estimate of liabilities from failed private sector funded pension schemes that will be taken on by the Pension Protection Fund in light of faster-than-expected GDP growth,” the OBR added.
‘Double lock’ saves billions
Finally, the temporary downgrade from a triple lock to a double lock on the state pension, which will see increases calculated based on consumer price index inflation (3.1 per cent) rather than growth in average earnings (8.3 per cent), saved £6bn. The amount increases from £5.4bn in 2022-23 to £6.7bn in 2026-27.
The OBR’s Economic and Fiscal Outlook document nonetheless called into question the viability of further spending increases on health, social care and the state pension, given the limited remaining scope to shrink other areas of public expenditure.
“This will be a particular challenge given the government’s commitment to reach net zero and the additional spending that could entail, combined with rising interest rates that could see debt interest increasing as a share of spending,” the document stated.
Higher excess mortality and a lower-than-expected cost of state pension underpayment corrections saw pensioner benefits spending decreasing by £500m, but has been revised upward by £4.2bn a year on average from 2022-23 onwards.
Budget 2021: Sunak announces further changes to DC charge cap
Chancellor of the exchequer Rishi Sunak announced on Wednesday that the government will consult “within the next month” on further changes to the charge cap intended to encourage more investment in illiquid assets by defined contribution schemes. But experts have said this is “missing the point”.
State pension underpayments were identified in 2020, affecting married women with husbands eligible for a state pension from 2008 and who were unknowingly entitled to an “enhanced” pension that could have boosted their payments by as much as 60 per cent.
Though the problem was identified as being systemic, further investigations revealed that the cost forecasts were “considerably too high”, the OBR explained.
“Total back-payments have been revised down by more than half, from £2.7bn to £1.1bn, while total continuing costs have halved from £600m to £300m,” it said.
