Is George Osborne about to snatch Gordon Brown’s crown as the pension industry’s biggest villain? Judging by some of the conversations I had at last week’s Conservative conference, it appears increasingly possible.
Brown’s £5bn a year tax raid has gone down as arguably the biggest crime against retirement saving. Osborne’s team are surely working out what a similar reduction in tax relief on pensions would do for his personal popularity ratings.
Osborne has demonstrated he does not mind drawing flak with his decision to cut child benefit for higher-rate taxpayers and upsetting 1.5 million middle-class families. That cut makes the low-hanging fruit of higher-rate tax relief look vulnerable.
Even hardened party activists were shocked at the child benefit announcement. The apparent unfairness of allowing a couple with combined earnings of £86,000 to receive it while axing it for those where one parent earns £44,000 may have contributed to the anger. But whichever way Osborne had targeted child benefit, he would have drawn criticism for attacking the family.
The child benefit move will only save the Treasury £1bn a year. Compare that with the £7bn that could be saved by making tax relief a flat rate 20 per cent and the arguments of those who say its days are num-bered do not look so fanciful.
Treasury financial secretary Mark Hoban says Isa allowances are safe. But Isa tax relief is far cheaper than that on pensions as the Treasury does not have to fund it directly up front.
Getting rid of higher-rate relief on pensions would allow the Government to clear £35bn of debt over a Parliament.
Curtailing it, perhaps with some greater incentive elsewhere to give a positive spin on the changes, could still make a massive contribution to the deficit reduction plan.
The Treasury has said the annual allowance will be somewhere between £30,000 and £45,000. The child benefit cut has reminded us just how severe these cuts are going to be, and make me think that a limit nearer to £30,000 than £45,000 seems more likely.
Surely even a £30,000 annual limit would amount to a tax raid on pensions of some sort?
Thereafter, will Osborne cut the annual limit completely over the following two years?
A few months ago, it seemed that only Michael Johnson, the author of the Centre for Policy Studies paper Simplification is the Key, was saying that such an outcome is likely.
An increasing number of industry insiders I talk to today are privately saying providers have been told to expect something along these lines.
Would the tabloids lament the loss of higher-rate tax relief when the Chancellor is asking people in all income brackets to make sacrifices? The answer is that probably some would and some would not.
Osborne knows the risks he would be taking. He would also be reminded that 12 months ago, at last year’s conference he pledged to reverse Brown’s pension tax raid “when we have got on top of the deficit”. And critics would point to his statement, in the same speech, that described Brown’s removal of advance corporation tax relief as “heralding the start of the age of irresponsibility”.
We may not find out whether higher-rate tax relief’s days are numbered in the comprehensive spending review. But if Osborne does take the knife to higher-rate relief or decides on a slow strangulation of the annual allowance, then, in pension circles, he can expect to be mentioned in the same breath as Gordon Brown.
John Greenwood is editor of Corporate AdviserMoney Marketing