Former pensions minister Steve Webb has blasted Conservative plans to cut tax relief for high earnings, branding the reforms a “dog’s breakfast”.
Ahead of the general election, the Conservatives set out proposals to reduce the annual allowance for people earning more than £150,000. Under the plans, annual allowances will be tiered on earnings between £150,000 and £210,000, with those earning £210,000 seeing their allowance cut from £40,000 to £10,000.
Webb, who favours fundamentally reforming the system and introducing a flat-rate of tax relief, says: “The Conservative’s plans are a dog’s breakfast, they are just hideous. Do people know what their annual limit is going to be at the start of the year? You don’t know what your income is going to be, so is it based on your income for last year? And then do you have a different annual allowance every year?
“It is just horrific and another reason why we need to fundamentally sort out pensions tax relief.”
Webb says he would have sought to gain greater influence in the Treasury had he retained his position in government.
He says: “Had I been re-elected I would have worked hard to get it sorted out properly. My cunning plan, if I had been re-elected as part of another coalition, was to go for a joint-ministerial post between the Department for Work and Pensions and the Treasury.”
Webb also defends the state pension triple-lock, a reform he helped drive through during his term in office.
The Institute for Fiscal Studies recently warned the policy results in a “ratcheting effect” through which state pensions are guaranteed to exceed both earnings and prices in the long-term.
IFS figures suggest the state pension will likely exceed earnings and inflation by 0.3 per cent every year under a triple-lock. It says this will increase state pension spending by around £15bn a year in 2015/16 terms compared with a policy of earnings indexation.
Senior Conservative MP and former defence secretary Liam Fox has also criticised the triple-lock.
Webb says: “People just don’t get it on the triple-lock – they think that the government is simply buying pensions votes.
“What we have done is essentially privatised earnings-related pension provision. So all the state is doing is the first tier.
“You are retired for 25 to 30 years, so if that bit is not indexed and everything else isn’t indexed, which is likely in the future, then every pensioner will have 30 years of declining living standards.
“So if the state pension is not indexed through retirement we have got a problem, particularly if inflation comes back.
“It is also vital for provision for women. In many ways auto-enrolment is an issue for women’s pension provision because, if it is linked to how long you work and what you used to earn, then on average women will get smaller pensions.
“So if we don’t have a decent state pension, then for women we will have gone backwards.”
Webb also says there is a “gap” for simple, low-cost advice and suggests this could become part of the Pension Wise service.
He says: “I had a conversation with a Treasury minister about what advice might cost, but the numbers we got were very big.
“I have always felt there is a gap for budget advice and I also think Pension Wise can develop. It is not beyond the realms of possibility to imagine Pension Wise having some sort of low-cost advice offering built into it at some point.”
Webb says pensions minister Ros Altmann’s first priority should be to initiate public discussions over how to raise automatic enrolment contribution rates above 8 per cent.
He says: “The Government needs to look at the auto-enrolment minimum contribution issue now. My worry is other things will intervene and we will get a 2017 review or something like that, and then nothing much will happen.
“The risk then is we start to get large numbers of people paying in 8 per cent, so we need public work to be done on that as a matter of urgency.”
Steve Webb on…
Delaying auto-enrolment for small firms: “We had to battle to keep auto-enrolment going and the price for that was to give the next government the chance to stop it before we got to the small firms.”
Drawdown charge caps: “There will be a lot of tough talk but I expect the focus to be on regulatory process rather than price.”
The pension freedoms timescale: “I’m not sure we could have had a longer timescale. If we had given people longer the pent-up demand would have caused absolute mayhem.”