There is so much rumour and innuendo about pensions at the moment that I wouldn’t be at all surprised if by the time this blog appears, some of it will be out of date – or at least many of the rumours I am referring to here will have been superseded by new rumours.
Currently what appears to be grabbing everyone’s attention is what George Osborne may or may not do to pensions tax relief and allowances in his forthcoming budget in March.
A fairer tax system?
Speculation is widespread in the industry and in the press about big changes to a system that has already changed several times over the last few years. The government spin machine is in full flow, talking about the need for a fairer tax system which is simpler and easier to understand.
"The government spin machine is in full flow, talking about the need for a fairer tax system which is simpler and easier to understand."
Let’s be clear about one thing. I don’t know any more than anyone else outside of the Chancellor’s inner circle about exactly what he may be planning to do. What I do know is that this is all being driven - not by issues about fairness or simplicity - but by a desire/need to save money, and big money at that.
Pensions are a soft target
Having failed to make the savings he needed to pay down the deficit from a reform of working tax credits, Mr Osborne obviously has to look elsewhere to recoup the money he needs. And much as it pains me to say it, pensions are a soft target for a Chancellor who really has nowhere else to go. Health, education, overseas aid and other significant areas are all unfortunately out of bounds.
So what specifically might he latch on to? According to reports published in the Financial Times, George Osborne is contemplating announcing a single tax relief rate for pension savers of between 25% and 33% to replace the existing 20%, 40%, 45% rates. This could be quite profitable for the exchequer. A tax relief rate of 25%, for example, would save some £5 billion pounds a year.
The political selling point of this would be different, of course. The redistributive nature of the change would be emphasised and the encouragement it would give to younger generations to save more into a pension. 24 million basic-rate taxpayers would be better off compared to 5 million higher rate and top-rate taxpayers who would lose a benefit worth, perhaps, up to £8,000 a year.
Reductions to LTA and AA
And it is unlikely to stop there. It seems that once again the Chancellor has his beady eye on the Annual and Lifetime Allowances. It is rumoured he may be looking to halve the Annual Allowance for defined contribution (DC) pensions from £40,000 to £20,000 and to reduce the Lifetime Allowance for defined benefit (DB) from £1 million to £750,000.
Pensions are clearly becoming (have become) a political football which can be played and manipulated by politicians at will. Such continual negative tinkering with the rules and the uncertainty it generates could, in the long term, have a devastating effect on consumers’ confidence and their willingness to engage with pensions as a suitable and secure savings vehicle for their retirement. They need, as does the industry, a period of respite from all of this, some stability and an opportunity to recover lost ground.
George Osborne for PM?
George Osborne may have his sights set on becoming Prime Minister and he could well ascend to that lofty position in due course. In the meantime it would do him and the country no good if his legacy as Chancellor were to be the man who destroyed a once proud pension system and left it in chaos and terminal decline.
This blog first appeared in Money Marketing