If there is one thing that can be said of Chancellor George Osborne it is that he, unlike some in his own party and almost all of the opposition, is prepared to get down and dirty in the world of personal finance.
Over the past two or three years, the range of populist measures he has unveiled in successive Budget speeches are radically reshaping the way we save money and what we do with our savings pots.
Whether you agree with the specific thrust of his policies, or believe he is opening successive cans of worms in his quest to raise more revenues, at least he is prepared to be daring in his approach.
His latest Budget last week is a case in point. Osborne announced a range of actual and potential changes on pension and Isas that other chancellors would probably not dare to make – in some cases for good reason.
For example, his move to remove tax breaks from buy-to-let landlords would have been an unthinkable move for an incoming Labour government, wary of taking on such a massive and vocal interest group.
The Guardian estimates some two million buy-to-let landlords could see half their profits wiped out by Osborne’s move to reduce mortgage tax reliefs from 40 per cent to 20 per cent. For those with large BTL mortgages, this will have a serious effect. That said, larger landlords are saying they will compensate by raising rents.
A similar picture emerges over the reduction in tax relief on pension contributions for those earning more than £150,000 – earnings which include both employer and employee pensions contributions themselves, incidentally – using the money to increase the inheritance tax limit to £1m.
Essentially, the Chancellor is removing tax breaks on pension saving from an estimated 300,000 people who earn in excess of £110,000 (taking into account their own and employers’ contributions) in order to remove a few thousand estates annually from the IHT net.
True, he has introduced a taper on such largesse, starting at £2m, which limits the level of this handout to those who inherit assets they have not earned. But it makes you wonder how Osborne is managing to square such a move with the Conservative philosophy of helping so-called “strivers” – those who actually work hard for their money.
If the argument was that those with large salaries needed to have a reduction in the tax relief on their pension savings, why not simply equalise the rate of relief at 30 per cent, as former pensions minister Steve Webb has argued?
Or even reverse the relief, with 40 per cent for those on basic rates of tax and 20 per cent for those on higher rates?
Then there is the “consultation” with respect to changing the tax treatment of pensions, making them more akin to Isas. What was interesting about this announcement was it came at the same time as it is becoming clear that anticipated tax receipts in respect of people accessing greater slices of their pensions are approaching £700m, compared to previous Treasury estimates of £320m.
My worry with respect to doing away with contributions into pensions but offering access to them free of tax is threefold. First, such a change will disproportionately benefit the better-off who expect to be on higher earnings even after retirement. This will be at the expense of those who were just above the higher rate of income tax but expect their incomes to be below this level when they stop work.
Second, the Government is simply kicking the can down the road in terms of reducing the amount of tax relief it is forced to give on contributions every year. True, it will save money now but at the expense of potential revenues from a growing number of pensioners who would have been expected to pay tax on at least some of their retirement incomes two decades down the line.
My third concern is with the behavioural changes the Government’s move could engender. Until now, saving specifically for retirement was helped by the notion that there was, in effect, a ring-fenced pot that could only be accessed after a certain age.
The pension freedoms reforms supposedly mean many people can buy themselves Lamborghinis, according to Webb, although it is doubtful how many will actually want to do that compared with using the money to pay off debts, finance small practical projects or help their kids get on the housing ladder.
But if you are telling people there is no incentive to save for retirement in the here and now and that when you do the money will be treated in exactly the same way as an Isa, why would people want to bother?
One or two commentators have suggested the Chancellor might offer some sort of matching scheme, whereby savers receive £X for every pound they save themselves.
This could work, as long as it is restricted to a certain amount of money per year, giving it the potential to have a redistributive effect – and helping the lower-paid save for their own retirements.
Either way, at least Osborne is prepared to look at an ossified system to see whether there are more effective ways to make it work. I somehow doubt Labour would have dared do the same.
Nic Cicutti can be contacted at firstname.lastname@example.org