Could the green paper on the reform of pension tax relief lead, in George Osborne’s words, to the “strengthening of incentives to save and offer savers greater simplicity and transparency”? Well, it might. But it obviously depends on exactly what is decided at the end of the day and how it is viewed by those who are (or are considering) saving into a pension.
The concept of a single rate of tax relief of, say, 30 per cent, arguably offers the best chance of success. However, even that will not be seen as particularly simple by payroll operators or as a strengthening of incentives for higher rate taxpayers. Indeed, the reverse would no doubt be true for those in the latter category.
But all of that may be academic if the Treasury goes ahead with what I suspect could well be its first choice: the more radical option of a reversal of the existing tax process for pensions, so they are treated more like Isas.
“You pay in from taxed income and it is tax free when you take it out,” said Osborne in his Budget speech earlier this month. Sounds simple enough, doesn’t it? As ever, though, things are not always as clear-cut as they might first appear. Indeed, the prospect of a switch of exempt-exempt-taxed into something more akin to taxed-exempt-exempt could be incredibly complicated, involving everybody having to have at least two separate pension funds (one before and one after the changeover date), and the consequences this might have, in particular, for the future of DB schemes.
The lack of tax relief on contributions on the way in, as it were, could turn young people off the idea of putting money away into a pension on the basis that a “bird in the hand is worth two in the bush” and they could not be sure the withdrawal of their money free of tax would be honoured by a future government many years hence. There also surely needs to be some sort of government top-up at some stage to cushion the loss of up-front tax relief and provide an incentive to lock money away until closer to retirement age.
Nonetheless, it would be surprising if the Chancellor did not have his beady eye on pension tax relief as a means of raising extra revenue to help deal with the many financial demands coming his way over the next few years. Not having to pay out up-front relief on contributions would give him a considerable boost in that direction. In 2013/2014, the total bill for tax relief on pensions was a massive £48bn: a target, I would suggest, he may well find impossible to resist.
I am not suggesting the consultation will not be an open and wide-ranging one but I have got a feeling I know what the outcome will be. Let’s hope pensions are not the loser and the benefits being accrued from auto-enrolment and other recent innovations are not put in jeopardy as a result.
Malcolm McLean is senior consultant at Barnett Waddingham