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Pensions tax policy needs to be more than a political football

Successive governments have taken an unserious approach to pensions policy

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A new government should aim to build consensus around a pensions tax system people can rely on.

Successive governments have taken an unserious approach to pensions policy, and Jeremy Hunt’s budget is another episode in that sorry tale. That needs to change argues Jill Rutter.

Tax treatment of pensions is about enabling and persuading current workers to forego some of their current income to ensure they can afford a decent old age. And a good pensions tax regime gives clear and stable signals to savers about how best to save for their pension over their working lifetime, taking into account current demands on their incomes. It used to be easy for most employees when jobs were for life, and people could rely on a defined benefit scheme which would turn up on time at an appointed retirement age. Now long-stay civil servants and other public sector employees are the only group who can rely on that benefit (though recent governments have made those schemes less generous).  

The system never worked well for people who churned through jobs, did not have employers who offered a company pension scheme or were self-employed. The government filled one gap with the gradual rollout of  the Pensions Commission's recommendation of automatic enrolment – to ensure most employees are now offered a pension contribution by their employer – to increase pensions savings. 

Whether those savings end up being anywhere near adequate to remove people from poverty in old age is another question, and the Work and Pensions Select Committee has called for contribution rates to be increased. The Treasury appears to be reticent to do anything that would increase the cost of tax relief on scheme contributions – and confused the picture when it introduced its Lifetime ISA as a potential competitor to automatic enrolment for younger earners. This is perhaps a demonstration of the Treasury’s tendency not to act as a team player across government – rather than use its fiscal firepower to support a policy which is the responsibility of another department, it too often prefers to back its own ideas. The end result is a mess of half measures.

George Osborne fiddled with the pensions system with unintended consequences

Meanwhile George Osborne used pensions tax relief as a slush fund to subsidise other changes. Over the 2010s, the lifetime and annual allowances were cut back – without much thought seeming to be given for how this would interact with remaining defined benefit schemes, like the NHS scheme, at the top end. Successive budgets dipped into what appeared to be a painless pot. That is how a lifetime allowance of £1.8m in 2011/12 reduced to just over £1m under successive Conservative chancellors until Jeremy Hunt made his screeching U-turn of abolition – and accompanied it with a 50% hike in annual contributions (taking the limit to £60,000) for anyone earning less than £260,000 a year and with enough spare cash to put it into their pension.

But while Osborne was clamping down in one direction, his other moves freed people up to take more out of their pensions earlier – again in a way that brought more money into the exchequer sooner. So-called pensions freedoms were a giant budget rabbit – and may themselves be a critical factor enabling people to quit working sooner if that’s what they want to do

The post-budget money advice columns in the broadsheets are all full of advice to high earners on how to game the new system – when to crystallise existing pension benefits or how to stuff their pensions for the remaining period of the Conservative government – and then withdraw before a Labour chancellor fulfils the party's pledge to restore the lifetime allowance. So even if the new scheme is enough to entice the estimated 15,000 older workers to hang on, it may only be buying another 18 months or so of employment from them. But already there is discussion of whether the labour market consequences of re-imposing the LTA will force Labour to think again about whether they can put that pledge into their manifesto.

A new government should aim to build consensus around a pensions tax system people can rely on

What a new chancellor or a new government should offer is – just as the Labour government did with automatic enrolment – an in-depth review of the way in which government can maximise the benefits of the tax treatment of pensions across the whole economy; and then work out how to deal with the consequences for critical workers in pensions schemes where the system may be a disincentive to stay in work. It should then build a cross-party consensus to reassure workers that they can rely on the future stability of the tax system to support them in saving for their retirements.


Political party
Conservative Labour
Sunak government
Public figures
Jeremy Hunt
Institute for Government

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