It’s far from clear what is going to be in next week’s budget – but it’s very clear now what isn’t going to be there. The Treasury had been “consulting” on proposals on plans for a new ISA style pension – which would generate a huge amount of additional tax revenue in the short-run – but risk reducing pension saving and retirement income in the longer run.
That change would have come on top of the welter of changes that Chancellors have introduced to the tax treatment of pensions in the last few years, most notably the reduction in amount that can be paid in yearly, the introduction of (and then reduction in) the so-called lifetime allowance and the removal of the annuity purchase requirement.
At the same time, the Government’s policy of automatic enrolment proceeds, reaching those least likely to have had a pension before. Removing upfront tax relief from those new savers, just as they start to get the pensions saving habit, would have been a hard blow, even if the biggest impact would have been on those higher up the income tax scale.
In the wake of the Chancellor’s apparent climb-down (all behind the closed door of No.11, though the pensions minister was unusually open in the media lobbying against change) where are we left?
Here are four tips the next Chancellor might want to consider before embarking on pension – or any other significant tax – reform:
1. The case for reform still exists.
If public funds – through tax relief – are going to be used to support incomes in retirement – it is far from clear that giving the biggest benefit to the highest earners is the best use either in terms of equity or reducing the call on public funds in retirement.
2. Tax relief cannot be looked at in isolation from pension policy more generally.
In retrospect, it would have been good if the Turner Commission had been allowed to look at the (now) £31bn annual support the Treasury provides for private saving into pensions as it looked at how to reform the system more generally.
3. Pensions are too important to people’s future welfare to become a plaything of Chancellors.
Repeated piecemeal tinkering is destabilising and unnecessary. Pensions Minister Steve Webb complained that even he was kept in the dark about the Chancellor’s first reform. He knew about the 2014 reforms – but they came as a bolt from the blue for the annuity industry. Since then there have been rumours of more reforms.
4. Pension saving requires trust between politicians and the public.
One of the objections to the idea of switching tax relief to the back-end rather than continuing it upfront as now was simply that no one really trusted future Chancellors to keep their hands out of future pension pots. If people are to have confidence to embark on what is in effect a fifty year savings plan, they need to be assured of cross-party support – and institutions that will stop the value of their savings being reduced at a Chancellor’s whim.
If a future Chancellor – or even a post-EU referendum George Osborne – wants to revisit pensions policy, he needs to promote a comprehensive, principled, review that puts the long-term interests of taxpayers and future pensioners at its heart. And that review needs to engage the public in the complex choices and, as was the case with Turner, build cross-party consensus.