Ministers have already made noises about building consensus on certain areas of public policy and, Tom Selby points out, pensions are desperate for the kind of certainty consensus can bring.
We do not even know when the Budget is going to be held yet the Treasury has already fired the starting gun on speculation about the future of pension tax relief. If you blinked – or do not subscribe to The Sunday Times – you might have missed the article in question, penned by political editor Tim Shipman at the end of July.
“Philip Hammond is eyeing taxes on fuel, homes, pensions, incomes and business as he tries to use November’s Budget to plug a multi-billion pound hole in public finances,” Shipman wrote. “The Chancellor [has] ordered a line-by-line examination of public spending to identify savings after the Tories ditched large swathes of their manifesto following the general election.
“An end to a freeze in fuel duty and a cut in higher-rate pension tax relief are on the table, as is postponing the 2020 target for letting people earn £12,500 before they pay income tax.” Officials were even said to be at the “blue skies” thinking stage of policy development – whatever that means.
The nuclear option would see higher-rate pension tax relief disappear altogether, with everyone receiving the same 25% government bonus regardless of what they earn. This would clearly save the Chancellor billions and has long been advocated by influential right-wing thinktank, the Centre for Policy Studies.
Indeed, if the government can win support from the Labour Party – not beyond the bounds of possibility, given it is those on higher incomes who would be hit – then such fundamental reform might be possible even without a Parliamentary majority. It would, however, risk alienating core Conservative voters and, in the process, cause potentially terminal damage to the leadership’s already-waning popularity.
A more realistic outcome would see the government tinker with existing limits – perhaps cutting the £40,000 annual allowance or £1m lifetime allowance. Alternatively policymakers might be tempted to mess about with the hugely complex annual allowance ‘taper’ – perhaps shifting the income threshold from £150,000 to £100,000.
But as well as creating more damaging uncertainty for savers, it is worth considering that a £1m pension pot buys a healthy 65-year-old an annuity worth £24,570 (Source: Money Advice Service annuity calculator, 01/08/17. Inflation-linked, single-life annuity price after 25% (£250,000) tax-free cash taken).
That is a decent income but hardly a fortune. Cutting it back further would send a worrying anti-savings message at just the wrong time as automatic enrolment attempts to encourage the nation into the savings habit.
More fundamentally, this renewed speculation risks creating poor consumer outcomes. We know from the Financial Conduct Authority, for example, that some people are taking their entire pot out of pensions from the age of 55 to put it in a bank account simply because they do not trust the Government not to alter the rules.
Pension tax policy is crying out for a period of stability. Ministers have already made noises about building consensus on certain areas of public policy – and pensions are desperate for the kind of certainty consensus can bring.
The starting point should be to convene an independent commission tasked with reviewing the system and considering possible changes to ensure it is fair and sustainable for the long term. Until that happens, the Treasury’s need to raise short-term cash will remain the enemy of sensible pensions policy.
Tom Selby is a senior analyst at AJ Bell