Like most non-normal people, I have read and reread the Pension Green
Paper and Inland Revenue consultation paper many times already this
year. I need to get my head round them so I can do my job but I would
be lying if I didn't say I find them really interesting too. The
Revenue paper, especially. Some of it knocked me out when I first
read it and some bits of it still surprise me as I keep going over
the words in my mind.
In particular, and to give you an example of what I am on about, take
tax-free cash lump sums. Now, excuse me but haven't we been through a
decades-old annual pre-Budget ritual where every newspaper has been
required to carry worrying quotes from experts predicting the end of
tax-free cash on pensions? I think you will find we have. In fact,
it was only a few weeks ago, in the run up to the publication of the
Revenue paper, that this ritual was at the full height of one of its
periodic frenzies. Millions of people were worried, I'm sure –
unnecessarily, as it turns out.
Far from abolishing tax-free cash, the Revenue is actually proposing
that many people should get more tax-free cash under the new rules
than they would have done under the old ones.
Blimey, that's a turn up for the books. No one was expecting that.
Inland Revenue 1, Pension Experts 0, sort of thing. Against the run
of play, some are saying, an own-goal even, sloppy back-pass, not the
sort of thing the home team will be happy with.
I don't think I agree. If you read the words carefully (which is the
way the Revenue guys tend to choose them in the first place) they
seem to have had a road-to-Damascus moment on this.
First things first. Every self-respecting pension expert knows that
we only got tax-free cash in the first place because our private
pension system was based on the pension arrangements that were put in
place for civil servants in the 19th Century. They had an annuity and
an untaxed cash gratuity at retirement, so we all got the same.
Simple as that. That's the way it was and we have always worried that
it would one day be seen as an anachronism that would have to be done
away with. That is why the experts have all had one eye over their
shoulder for so long wondering when the blow was coming. The Revenue
now seems to be saying it never will, if the words used in this
consultative paper are anything to go by. What they actually say is
Generous as tax relief is, the Government recognises that people do
need encouragement to lock away their money, perhaps for decades,
until they are ready to begin to draw benefits from their pension
savings in later years. The tax-free lump sum provides that
encouragement. It can provide a substantial capital sum, perhaps
allowing people to put their financial affairs in good order when
they retire. It may even offer once-in-a-lifetime opportunities such
as visiting family in other countries or paying for home improvements
to make retirement more comfortable.
It's difficult not to be amazed by that, isn't it? Here we have the
Revenue saying there is a purpose to the tax-free cash sum after all.
It is a reward to savers for locking their money up for so long a
time. So, it doesn't look likely that they will be able to get rid of
tax-free cash in the future, nor presumably would they even want to.
The only downside I can see to the whole thing is that personal
finance journalists will have to work a bit harder in future to find
a similarly compelling horror story to fill the gaps left by
perennial tax-free cash shock and panic stuff. But I am sure they
will come up with something suitable. People saving too much in
pensions and not spending enough in the high street perhaps?
Steve Bee is head of pensions strategy at Scottish Life