The Treasury has set out four key tests against which any new model of pension taxation should be measured. These are that any reform should: be simple and transparent, encourage individuals to take personal responsibility for retirement saving, build on the success of auto-enrolment, and be sustainable.
It is the last factor that suggests maintaining the status quo is unlikely to be the Treasury’s preferred route. While generous tax breaks for the wealthy are long-held Conservative ideals, the concept does not exactly sit well with the Government’s “long-term fiscal strategy”.
So, to the alternative models on the table. A flat-rate of pension tax relief has the industry’s backing, but if the numbers are anything to go by, not the Government’s.
Morgan Stanley has produced some illuminating research on this, modelling the expected tax take of each option under consideration.
The no change model obviously does not increase cashflows for the Exchequer, so, for the reasons set out above, that one is probably out. Flat-rate is marginally better but arguably negligible in the grand scheme of things, with no upfront tax benefit for the Government and bringing in an extra £7bn to £9bn a year.
And here is where it gets interesting, at least from the policymakers’ point of view. The controversial pensions as Isa idea would generate an additional £12bn to £19bn a year.
But where the maths really gets appealing is in managing the transition from one tax system to another. Money Marketing is hearing whispers of a one-off tax charge to align savers to a TEE system, a so-called pension taxation “big bang”. Talk has apparently turned to introducing this on a voluntary basis, with consumers and providers free to choose this option or not. Morgan Stanley estimates the boost to Treasury coffers of this one-off tax hit to be between £28bn based on 10 per cent take-up, to a whopping £114bn based on 40 per cent take-up. The possibility that anything like that kind of money could flow from insurers to the Government is a prospect likely to make the Treasury bean counters go weak at the knees. The same is true for insurers, but for opposite reasons.
The difficulty with TEE is it is hard to argue that taking away upfront incentives to save will encourage better retirement provision. But one thing is clear: Chancellor George Osborne has form when it comes to uprooting the pensions industry.
As Morgan Stanley points out, Osborne’s penchant for change means radical reform is the least we can expect.
Natalie Holt is editor of Money Marketing. Follow her on Twitter: @Natalie_Holt_MM