There are so many rumours around pensions at the moment I would not be surprised if some of this article is out of date by the time it appears, or at least many of the rumours I am referring to will have been superseded by new ones.
One of the biggest topics currently grabbing peoples attention is what the Chancellor may or may not do to pensions tax relief and allowances in his forthcoming Budget in March.
Speculation is widespread about big changes to a system that has already seen so many over the past few years. The Government spin machine is in full flow, talking about the need for a fairer tax system that is simpler and easier to understand.
Now, I do not know any more than anyone else outside of the Chancellor’s inner circle exactly what he may be planning to do. What I do know, however, is that this is all being driven not by issues about fairness or simplicity but by a need to save money, and big money at that.
Having failed to make the savings he needed to pay down the deficit from a reform of working tax credits, Osborne obviously has to look elsewhere to recoup the money he needs. And much as it pains me to say it pensions are a soft target for a Chancellor who really has nowhere else to go. Health, education, overseas aid and other significant areas are all, unfortunately, out of bounds.
So what specifically might he latch on to? According to reports published in the Financial Times, Osborne is contemplating announcing a single tax relief rate for pension savers of between 25 per cent and 33 per cent to replace the existing 20 per cent, 40 per cent, 45 per cent rates. This could be quite profitable for the Exchequer. A tax relief rate of 25 per cent, for example, would save some £5bn a year.
The political selling point of this would be different, of course. The redistributive nature of the change would be emphasised, as well as the encouragement it would give to younger generations to save more into a pension. Twenty-four million basic rate taxpayers would be better off compared to five million higher rate and top rate taxpayers who would lose a benefit worth, perhaps, up to £8,000 a year.
And it is unlikely to stop there. Indeed, it seems that once again the Chancellor has his beady eye on the annual and lifetime allowances. It is rumoured he may be looking to halve the annual allowance for defined contribution pensions from £40,000 to £20,000 and to reduce the lifetime allowance for defined benefit from £1m to £750,000.
Pensions have clearly become a political football that can be milked and manipulated by politicians at will. Such continual negative tinkering with the rules and the uncertainty it generates could, in the long term, have a devastating effect on consumers’ confidence and their willingness to engage with pensions as a suitable and secure savings vehicle for their retirement. Both they and the industry need a period of respite from all of this: some stability and an opportunity to recover lost ground.
George Osborne has his sights set on becoming Prime Minister and he may well ascend to that lofty position in due course. In the meantime, it would do him and the country no good if his legacy as Chancellor were to be the man who destroyed a once proud pension system, leaving it in chaos and terminal decline.
Malcolm McLean is senior consultant at Barnett Waddingham