Having scrapped the secondary annuities reforms, says Tom Selby, Chancellor Phillip Hammond must now go further and remove pensions tax relief from the political front line.
George Osborne made a number of mistakes while in charge at the Treasury. The former Chancellor – supposedly responsible for strategy in the Conservative Party electoral machine – was infamously forced into embarrassing U-turns on tax measures aimed at older people (the ‘granny tax’), Greggs customers (the ‘pasty tax’) and caravan-owners (the, well, ‘caravan tax’).
But his fatal error was making an enemy of Theresa May, the woman anointed Prime Minister following David Cameron’s hasty post-referendum departure. One of her first acts as PM was to sack the man who had been at the centre of Government for six years. And now the Treasury, under the leadership of Philip Hammond, has, equally unceremoniously, dumped Osborne’s plans – two years in the making – to create a secondary annuities market.
This announcement was not slipped out quietly in an Autumn Statement or carefully leaked to a political hack, however – it was press released. In almost seven years covering the pensions market, I have never seen a Government U-turn press released. This was the PR equivalent of a boot to the groin of the previous administration.
It was, of course, the right decision. At AJ Bell, we had argued from the start this proposal looked woefully deficient for a number of reasons – a lack of buyers due to the inherently short-term nature of the market, too many agents potentially reducing the value of savers’ pots and inadequate protections against pension scammers, to name but a few.
While the Treasury has belatedly found itself in the right place on this highly risky plan, leading savers and the industry up the garden path for 24 months – and, in the process, wasting valuable regulatory time and money – is no way to go about creating sensible, stable pensions policy.
But does this U-turn tell us anything about the future of pensions tax relief, that big policy beast, under Chancellor Hammond?
The Treasury has yet to respond formally to its consultation on ‘Strengthening the incentive to save’ – which included Osborne’s controversial ‘Pension ISA’ plan – although its stance in a Daily Mail story published on 18 October pointed to some welcome stability.
A spokeswoman is quoted as saying: “We consulted last year on pensions tax relief – and it very clearly showed that there was no call for reform. The Government concluded that this lack of consensus, along with the roll-out of automatic enrolment, meant that now was not the right time to make fundamental reforms to the system.”
While I agree wholeheartedly with this sentiment, the Treasury could go further still by backing AJ Bell’s call to set up an independent Pensions Tax Commission to review pensions savings incentives in the UK and recommend what, if any, changes should be made.
Under this plan – which would leave the final say in the hands of the Government – a new cross-party deal on pensions tax relief, similar to that achieved on auto-enrolment, could be forged. Once any reforms are agreed upon, they should be accompanied by a pledge not to alter pensions tax relief for at least a decade, with a review perhaps scheduled after five years.
This would put a stop to endless speculation over the future of pensions tax relief and begin to instil some certainty into a system that has been subject to endless fiddling by successive administrations.
By scrapping the secondary annuities reforms, Chancellor Hammond showed he is willing to go against the grain of the previous leadership. He must now go further and remove pensions tax relief from the political front line.
Tom Selby is a senior analyst at AJ Bell