Where, precisely, is Steve Webb steering pensions policy? In the past week or so, the pensions minister has been setting out his stall in a series of newspaper and TV interviews, including one with Money Marketing.
I will look at some of those policy ideas in a second. But first, it is worth noting that his choice of media – and what elements of his grand plan he coyly unveils in each of them – is fascinating in itself.
For example, I don’t believe it was an accident that the Daily Mail became a recipient of Webb’s suggestion that wage-earners in the 40 and 45 per cent marginal tax brackets should lose some of the tax relief on their pension contributions. The pensions minister told the Mail he supported a 30 per cent rate of tax relief for all savers, regardless of their income.
The potential sop to Mail readers was his suggestion that the £1.25m cap on pension pots should also be scrapped. In other words, “strivers” can save as much as they like without incurring a 55 per cent tax charge on the non-capped amount.
Elsewhere, Webb told Sky News that he thought people should be told how long they are going to live in order to help them make more accurate financial projections.
This raises the question of why people in manual occupations, who are much more likely to die younger, should be forced to wait as long for their state pensions as those who sat at a desk all their working lives. But I don’t suppose he wants to explore that particular avenue right now.
Meanwhile, Webb’s proposal to remove the cap would have only a minimal effect on Mail readers themselves: according to HMRC’s figures, a £1.25m pot might provide £62,500 in annual income with no tax-free lump sum or £46,875 if you do take the 25 per cent.
Either of these retirement incomes are way above what the near-totality of Daily Mail readers will ever receive. Still, if you want to take the sting out of an idea by dressing it up as something else, this is the way to do it.
It is also true that the case that removing higher rate tax relief for pension savings is not new. It has long been part of Lib Dem policy, albeit without reference to the equalisation of relief at 30 per cent.
Pensions expert Ros Altmann has also long argued in favour of scrapping higher rate tax relief. She points out that of the estimated £35bn – according to the Pensions Policy Institute – handed out by HMRC in relief on tax contributions, half this amount goes to top rate taxpayers.
Bear in mind that this group makes up just 14.7 per cent of the total tax-paying population in the UK, 4.3 million out of 29.3 million.
Moreover, most of this money is not recouped from pensioners either, due to what Ros has previously called “enormous amount of leakage in the pensions tax system.” Age-related tax allowances ensure many pensioners escape tax altogether and only 2 per cent of pensioners pay tax at the top rate.
Couple this with the 25 per cent tax-free lump sum they stand to get, not to mention now being able to take all of the pension pot in cash while paying only the marginal rate they are on at retirement, and you can see how this tax relief is skewed in favour of the better off.
In its report in July last year, the PPI was the first to recommend the notion of a 30 per cent “equalisation” in tax relief and it is this ball which Webb has decided to pick up and run with.
What he is ignoring, however, is another element of the PPI’s report, where it also recommended a cap on the 25 per cent tax-free lump sum
According to the PPI, three quarters of pension savers have a lump sum of under £40,000. They get one quarter of the tax relief on lump sums. Meanwhile, 2 per cent of lump sums are worth £150,000, but they receive almost one third of all the lump sum tax relief.
Its report recommended either reducing the tax-free lump sum to 20 per cent or capping the size of the tax-free lump sum to £36,000. In the latter case 75 per cent of lump sums would still be paid uncapped.
Raising the tax-free cap to, say, £50,000 or even £60,000 would leave even more lump sums to be paid without a tax charge, while still saving HMRC at least £1bn each year.
If Webb wanted to be truly radical, he could pick up on this idea too, perhaps using some of the savings to introduce another of Ros Altmann’s proposals, which I have long supported, that of a matching scheme for contributions into pensions.
For example, anyone on lower rate tax could receive a £1-for-£1 matching relief into their pension from HMRC up to a limit of, say £5,000 a year.
If Steve Webb is genuine about ensuring the vast majority of UK citizens enjoy a decent retirement income, he needs to stop looking over the shoulder at his current coalition partners and think of where he and the Lib Dems are more likely to be in another five years’ time.
Nic Cicutti can be contacted at firstname.lastname@example.org