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Tax relief reform and the political obsession with headline numbers

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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 

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. If Tax relief is fixed at 30% or indeed 20% how would salary sacrifice work for an ART, HRT or even BRT payer? Makes a mockery of Auto enrolment does it not?

  2. Whether or not the government is looking for populist headlines, the fact is that billions of tax relief on pensions is enjoyed by relatively wealthy individual to the detriment of those on low earnings who cannot afford to save but who pay a higher rate of income tax than they might otherwise be subjected to. Tax relief on pensions is a massive subsidy from the relatively poor to the relatively wealthy. The reality of the situation is that the middle classes will save for their retirement – even if there were no tax relief at all on saving. They are programmed from birth to be responsible and take care of themselves – thank goodness. It is only right and proper that any government should regularly review tax relief and pension tax relief has been a bone of contention for years – championed by the savings industry for their own benefit. Attacking the government for reviewing tax relief and its usefulness in the current austere times helps nobody. Let’s reform and reduce pension tax relief soon – as long as the money saved is not wasted.

  3. Attacking the government is not what this is about Lorna.
    The retrospective reduction in the value of the lifetime allowance is harmful to investors trying hard to plan for their future. Whilst it only affects a relatively small number of people it cannot be fair to tax people on benefits which may have been funded over the previous thirty to forty years. It is unfair that investors may have adopted higher risk strategies and exposed their assets to far higher volatility than they might have logically done had they known their risk related premium would be taxed at 55% when they come to crystallise their benefits.
    Lorna, whilst you are right that some people will save for their future regardless of the tax regime, it is unhelpful for those not in that group (but who are thinking of saving) when the schemes into which they are potentially going to save are retrospectively taxed.
    There is indeed a need to review the level of tax relief given to take account of economic circumstances, but there is a much greater need to create an environment of long-term certainty to promote and encourage saving.
    There are only three reasons people use pensions to save rather than other savings vehicles:
    i) To take advantage of tax relief on contributions
    ii) To benefit from tax free cash when they crystallise benefits
    iii) To discipline themselves to save SPECIFICALLY for retirement income
    The reason it is folly to retrospectively reduce the lifetime allowance is that it is UNFAIR. The man or woman in the street will only see the headlines and will not realise that it will never affect them, they will simply see the inherent UNFAIRNESS. This will therefore discourage them from saving for retirement.
    A much better solution is to reduce the lifetime allowance for tax relief on further contributions. In this way investors and potential investors can make a judgement as to whether or not to make further accruals or contributions.
    I do feel that there is too much pension tax relief given to the wealthy, but the solution is not to retrospectively penalise them.
    There are many other potential ways of raising revenue that do not involve retrospective taxation. But one should not forget that aside from benefitting the pensioner, pension funds are used to invest in the economy.

  4. Lorna – I pretty much agree with Brian Gannon above.

    It also needs remembering it is not really “tax relief”, it is simply tax dererral until you draw your pension income.All removing tax relief by deferring pay will do is distort the middle market and people will simply use different more flexible ways to save than using pension plans which actually puts the state at more risk of them spending it before retirement and falling back on benefits.

    Not giving tax deferral/relief on pensions is double taxation on the same earnings.

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