Leader: Damaging the incentive to save

When trying to second-guess the Government, it is always worth examining and revisiting the numbers.

A lot of figures are being bandied around on pension tax relief and the impact various models will have on both potential Treasury savings and the expected tax take.

The radical taxed-exempt-exempt or pensions as Isas model is estimated by Morgan Stanley to generate an extra £12bn to £19bn a year for the public purse, with a one-off tax charge generating a massive £114bn.

Meanwhile the flat rate model, now understood to be where the Chancellor is likely to end up, is expected to bring in an extra £7bn to £9bn a year. This would be supported by a £6bn saving if the rate was set at 25 per cent compared with the current pension tax relief system, according to the Pensions Policy Institute.

So is George Osborne really about to pass up the opportunity of a bigger multi-billion windfall to settle for something more politically palatable?

Setting the flat rate at 25 per cent would pave the way for Osborne to strike at the heart of claims that this Government is all about protecting and pandering to the upper echelons of society.

Higher earners will start to understand the meaning of Conservatives’ “we’re all in this together” mantra.

But there is a danger of the pendulum swinging too far the other way. By setting a flat rate which redistributes tax relief away from higher rate and additional rate taxpayers, savers who have historically had the most to gain from maxing out on pension contributions may decide to do away with pension saving altogether. That would clearly be an unwanted outcome for a Government looking to “strengthen the incentive to save”.

It is not even clear whether basic rate taxpayers will be particularly enticed by the “buy two get one free” messaging around a flat rate, when they are not really engaged with pension saving in the first place.

And this is before we get to the accuracy of describing a flat rate as a £1 Government top-up for every £2 saved, unless it is caveated by the disclaimer “but don’t forget, most of your funds will be taxed when you actually want to take money out of your pension”.

Somehow I do not think the Government will be shouting that particular message from the rooftops.

Natalie Holt is editor of Money Marketing. Follow her on Twitter: @Natalie_Holt_MM