After being berated for failing to consult with the industry over the rollout of pension freedoms, George Osborne may have just learned his lesson.
Last week’s Summer Budget saw a very loose and open-ended consultation on pension tax relief and “strengthening the incentive to save”. Apart from floating a vague idea about “treating pensions like Isas”, it is clear the Chancellor is expecting financial services firms to come up with the answers.
For Osborne, the watchword for any new model for pension taxation is “sustainability”. In other words, he wants it to be cheaper. With pension tax relief costing the Government almost £50bn in 2013/14, you can see why.
When you dig into the specifics of how to unravel the current pension tax regime, there are no easy solutions. This is a bullet the Government is only too eager to dodge.
Firstly, let’s deal with moving to the taxed-exempt-exempt model. There is the knock-on impact that taxing contributions aimed at plugging pension deficits would have on already-strained defined benefit schemes. There is also the interaction with auto-enrolment to consider, plus potential wrangles with European regulators over creating a pan-European pension.
Another objective Osborne wants to achieve is for any reform to pension tax to be “simple and transparent”. Advisers, providers and lobby groups have plenty of time (around 11 weeks) to meet this brief, and there are some alternative models already to hand: a flat rate of tax relief set around 30 per cent, as first mooted by Steve Webb; scrapping the lifetime allowance; Government top-ups or matching contributions to encourage lower earners to save.
Yet as Osborne preaches about simplicity, in the same breath he seems determined not to deliver it. From April 2016 higher earners will see their annual allowance tapered, so that those with income above £150,000 will be limited to £35,000 in annual pension saving, moving down to £10,000 for those on more than £210,000. The net has been cast wider than previously thought as income has been defined to include individual and employer pension contributions. Coupled with the changes to pension input periods, the resulting system is more complicated, not less.
The tapered annual allowance is also a vehicle to reduce pension tax relief further still if Osborne or future chancellors are blinded by pound signs in their eyes down the line. How this squares with “strengthening the incentive to save” has not been made clear.
Natalie Holt is editor of Money Marketing – follow her on Twitter here