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Osborne between a rock and a hard place on pension tax relief

MSands05

No-one ever said the big jobs were easy.

And as both Chancellor of the Exchequer, and the nation’s de-facto second in command, George Osborne doesn’t have an easy month ahead.

While the Prime Minister has the small task of bending the European Union to his will, Osborne faces his own struggles as he seeks to secure both his political future and a bolstered tax take for the Treasury.

With just under a month to go before Osborne presents his 2016 Budget, it is becoming increasingly clear that the Chancellor faces a high-wire act in revealing his plans for the future of pensions.

Osborne first announced a consultation on radical tax relief reform in July last year, presenting his first Budget as the Chancellor of a Conservative majority Government.

Standing at the dispatch box, the Chancellor said: “I am open to further radical change – pensions could be treated like Isas. You pay in from taxed income and it is tax-free when you take it out and in between it receives a top-up from the Government.

“This idea and others like it need careful and public consideration before we take any steps – this green paper asks questions, invites views and takes care not to prejudge the answer.”

Since then, very little has emerged.

The Government was keen to portray those initial soundings as an “open consultation” – at least until a wise Sir Humphrey made the point that all consultations are supposed to be open – and when I spoke to Treasury financial secretary David Gauke at the Conservative Party conference in October, he told me all options remained on the table, including no change whatsoever.

That has remained the line ever since, but what’s becoming increasingly clear is that whatever the Chancellor opts for, he’s likely to make some enemies.

The pensions industry has been vocal about its opposition to the radical pension Isa option right from day one, and only last month former pensions minister Steve Webb warned the Chancellor faced his “Gordon Brown moment” if he took this road.

Current pensions minister Ros Altmann hasn’t been much kinder, and it’s clear this represents the most radical, and therefore high-risk, option on the table – so much so that Money Marketing‘s pensions reporter has speculated it was only being mooted to attract support for a flat-rate.

But as the Budget draws closer, the the Conservative backbenches have also begun to find their collective voice.

And they have used it to criticise the flat-rate option, which will rob higher earners of the levels of tax relief they have previously enjoyed while also offering greater relief to lower earners.

I’ve been told by lobbyists the levels of concern among Tory MPs loathe to explain such a change to their constituents is growing, and that pressure is being passed on to the Treasury.

It’s also manifesting in some of the mainstream newspapers, where warnings of a “pensions raid” are growing.

This is particularly significant in a Parliament where the Conservative majority is a wafer thin 12, and Osborne faces increasing challenges in his bid to move next door into Number 10.

A Conservative Home poll of 700 Conservative Party members on candidates for the next party leader at the end of January put the Chancellor’s popularity below that of Liam Fox, Theresa May and Boris Johnson.

Of that quartet Osborne is the only one nailed-on to campaign against a Brexit.

That speaks to the bigger issues at play in this Parliament – certainly more significant than pension taxation – but if further momentum builds for revolt over higher-rate relief Osborne could be forgiven for asking what the future holds for an EU-supporting Chancellor who ignores his backbenchers.

And so Osborne finds himself between a rock and a hard place.

He can placate his MPs by either doing nothing, and seeking money elsewhere, or go for the difficult choice, and rip-up the pensions rule book for the second time in two years.

Or he can opt for the flat-rate, and risk further upsetting the tumultuous backbenches.

It’s tough at the top.

Mark Sands is politics reporter at Money Marketing

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. I do so enjoy playing with your headlines.

    This is another you could have made shorter and more appropriate.

    “Osborne under a rock.”

  2. Why does he not just try doing nothing with pensions for a generation. Give us and the pension world stability for the next 30 years. You do not have to keep meddling (especially in things you don’t fully understand) just for political spinning, totally ignoring the consequences to the millions your stupid and ill-informed decisions affect. Its not all about you George, my boy.

  3. Forget pension ISAs. Forget the annual allowance and encourage the accumulation of pension wealth and the economy that flows from it. Forget the Lifetime Allowance that can normally be planned around and probably raises less for the Treasury than it costs to administer. Set a sensible contributions cap with carry forward and find another way to mitigate the cost of tax relief that raises revenue in a more reliable income stream than one that is dependent on contribution levels or retirements. Some sort of nominal levy on income derived from pension assets? Anything but the mish-mash of rules we have built since 2006.

  4. It might help if we could know the objective of this possible switch to a universal rate of tax relief on pension contributions. If it’s just to limit the cost to the Treasury of allowing HRT payers full rate relief on their pension contributions, just cut it to a maximum of 30% and have done with it. But that would probably be eclipsed by the cost of giving everybody else a 5 or 10% uplift to the rate of relief presently allowed on their pension contributions. The books won’t balance.

    And what, if any, research has been done to determine whether or not a 5 or 10% uplift would encourage more BRT payers to save into a pension plan? Unless and until Osborne lays definitively to rest the perennial rumours about removal of the 25% TFC allowance at retirement, people are not going to trust a pension plan as a safe place to lock away their money until at least the age of 55 (already scheduled to rise to age 57). What is the minimum access age likely to be when someone currently aged 30 reaches the age of 65? 80? 90? 100 even?

  5. I agree with Marty Y why doesn’t he try doing nothing for a very long time?

    But as we all know that is not an option for meddling politicians. Get rid of the LTA. That is going to impact upon a lot of people who are by no means rich. And for Pete’s sake don’t reverse the changes to the taxation of pension pot holders who die.

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