The Sunday Telegraph’s scoop about the Government mulling an Isa cap shows once more the backward way politicians and civil servants think about long term saving incentives.
The Treasury is furiously denying any such move is on the agenda but its comment about being in “listening mode” all summer suggests it was certainly involved in a few of the kites being flown behind the scenes.
The Isa cap idea, like the Lib Dem’s proposed further cut in the lifetime pension allowance and Labour’s desire to reprise its horrendously complicated pension tax proposals, shows the primary desire for policy to be underpinned by big symbolic headline-grabbing numbers at all costs. The long-term impact of the proposals is always of secondary importance.
The idea of clamping down on “Isa millionaires” must have sounded great when first conjured up around the blue sky policy table. Until they realised there weren’t that many of them and it would raise little revenue. “Don’t worry, let’s just lower the limit, the lower we can get away with the more money we can raise.”
You’d think the concept of an Isa millionaire would be something policymakers would be promoting as an example of the benefits of combining regular saving, compound interest and long term exposure to the equity markets.
Given low savings rates, the Government should be exploring more ways to encourage an aspirational savings culture, not mulling a new tax on investment performance.
Any such cap could hit the investments of people who have been diligently saving on a regular basis over the years and don’t deserve to become the target of cheap symbolic gestures ahead of the general election.
Though we are unlikely to see an Isa cap appear in any of the main manifestos you get the feeling pension tax relief will face significant reform whoever wins the 2015 general election.
When quizzed about tax relief proposals at the Labour conference, Shadow pensions minister Gregg McClymont told our reporter to “watch this space”.
Labour is already proposing a cut to top rate pensions tax relief, from 45 per cent to 20 per cent for those earning over £150,000, but I suspect something more dramatic is being planned.
The last time I was able to quiz Labour about why it didn’t simply propose a stiffer cut in the annual allowance -easier to introduce, administer and likely to raise more money- the clear implication was that this was a symbolic Ed Balls policy aimed at getting an “attack on £150,000 earners” into the headlines.
Likewise, cutting the pensions annual allowance further below the £40,000 it will fall to next April would surely have been a more sensible move than the LibDem’s conference proposal to cut the lifetime allowance from £1.25m to £1m.
Cutting the lifetime allowance further will create a range of complications and the prospect of penalising investment performance. But hey, getting £1m into a headline is much more alluring to politicians than trying to explain the implications of cutting the annual allowance to £30,000.
The Pension Policy Institute’s recent paper, which found “little evidence” the £35bn spent each year on pension tax relief encourages saving among low and medium earners, has been well thumbed by policy strategists across all the main parties.
The paper set out a range of possible reforms, including 30 per cent flat rate of tax relief or capping the tax free lump sum at £36,000, and it would be no surprise to see some of these proposals making it onto the manifestos.
The Treasury’s own response to the PPI report; sending out a strong comment suggesting reform was on the cards and then trying to recall it a few days later like an errant email, suggests Chancellor George Osborne is also weighing up his own proposals.
Any further relief cut proposals may be accompanied by plans to boost the pension pots of low to moderate earners saving into a pension for the first time through auto-enrolment.
But it’s hard to believe this generation of politicians, obsessed with headline-grabbing numbers and constantly suggesting meddling reforms which have slowly chipped away at the nation’s confidence in long term saving, will come up with a progressive set of reforms that won’t do more harm than good.
Paul McMillan is group editor of Money Marketing- follow him on twitter here