Could a rock-solid economic picture lead to a pensions horror show?

Rowan Harris contributed to the writing of this blog

Has the Chancellor of the Exchequer perhaps exhausted his ideas for pensions?  It was interesting to see George Osborne recycling old Labour policy in his first Conservative budget free of the shackles of coalition.  Yet that is almost precisely what we got in the Summer Budget.

Let’s do the time warp again

It was Alistair Darling back in 2009 who announced that he would tackle the issue of a quarter of pensions tax relief going to the top 1.5% of earners by tapering the value of tax relief for people earning over £150,000.  The proposals changed over time – dropping the threshold to £130,000, including the value of employer pension contributions – but the pensions industry remained resolutely opposed to the complexity involved.

At the time, Osborne listened to these concerns.  When the coalition came to power, Osborne threw out the impractical in favour of simple cuts to the annual and lifetime allowances to boost the Treasury’s coffers.  It was a tough, but considered, decision based on engaging with those who would be dealing with the aftermath on a daily basis.

Since then, we have had a continuous series of cuts to the annual and lifetime allowances and the reintroduction of tapered tax relief.

With effect from the 2016/17 tax-year, the current Annual Allowance of £40,000 will be tapered for anyone whose total income including the value of pension savings is above £150,000 – so that if income is over £210,000, the Annual Allowance will be cut to £10,000.  Complicated transitional details have been set out in the Budget documentation.

Budget 2015 - Take Two

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It is clear evidence of a lack of joined-up thinking that this announcement was accompanied by a wide-ranging consultation on the future of pensions tax relief.

Science fiction double feature

George Osborne’s foreword includes the choice phrase:

"If people are to take responsibility for their retirement, it is important that the support on offer from the Government is simple and transparent, and that complexity does not undermine the incentive for individuals to save."

If Osborne truly believes this, hopefully this will be the last additional complication that is added to the pension taxation system before the outcome of the consultation is fully resolved. It is hard not to feel that some politicians simply see pensions as the new cash cow – particularly given the mention of a possible move to treating pensions more like ISAs.

Such a move would require great trust from the public that a future Government wouldn’t change its mind later on.  Given the tinkering Osborne has done with pensions over the last few years, this may be a significant barrier.

Thankfully the consultation contains no firm proposals and seems to be simply testing the waters.  The Government claims it will not pre-judge the outcome, and indeed the outcome may be no change.  Still, we would encourage the Government to listen to its own principles for reform set out in the paper and ensure that any future reform not only meets the Government’s fiscal strategy but is simple and transparent, and truly encourages pension saving.