“Political suicide.” That was my initial reaction to a report in The Times suggesting Chancellor George Osborne is considering taking the axe to pensions tax relief in this month’s Budget.
Why on earth would the Conservatives risk the wrath of pensioners it has spent the past five years desperately trying to woo?
The hugely expensive state pension triple-lock, retaining universal perks for retirees and, of course, the Budget pension freedoms are just a few examples of a party transparently targeting the section of society it expects to vote in its droves on 7 May. Surely hacking back pension tax breaks risks some seriously negative headlines from the right-leaning consumer press?
While a story on which The Times has clearly been well briefed cannot be dismissed out of hand, I don’t think the Coalition will follow Ed Miliband down this particularly dangerous rabbit hole for a number of reasons.
Firstly, Labour’s plans to taper away tax relief for people earning over £150,000 were torn up by the Coalition was it came into office in 2010. Pensions minister Steve Webb has described the reform as a “dog’s dinner”, so it would be a truly monumental U-turn if Osborne went down this road.
The second tranche of the Labour policy – cutting the annual tax-free allowance from £40,000 to £30,000 and the lifetime allowance from £1.25m to £1m – would raise “significantly more” than the £1.1bn brought in from the reductions in annual and lifetime allowance (from £50,000 to £40,000 and £1.5m to £1.25m) by this Government in 2014, according to the Institute for Fiscal Studies.
However, experts warn a further annual allowance reduction risks being seen as an attack on middle England, with doctors, dentists and senior public sector workers bearing the brunt – hardly a prudent election strategy.
Reducing the lifetime allowance from £1.25m to £1m looks more plausible – the policy has already been advocated by the LibDems and, because it is targeted specifically at pension millionaires, has the look and feel of a tax on the rich. But it would also be fiendishly complex and, inevitably, add to the complexity of an already complex pension system – not something a Chancellor attempting to solidify a reputation for economic competence would do lightly.
As the IFS says: “The further you go down the route of cutting the lifetime limit, the more you move away from the relatively desirable system of taxation where full relief is given upfront, returns in a pension are left free of personal taxation and income is taxed in full on receipt. This would increase the risks that people will be incentivised to undersave for retirement and that more effort will be put into securing tax advantages by using more complex schemes.
“If Labour’s reforms are implemented, then – like the reforms to pensions taxation implemented by the current Government – they would add further undesirable complexity and be a missed opportunity to rationalise those parts of the pensions tax system that are overly generous.”
Policymakers may well be in ‘Hail Mary’ territory when it comes to gaining an edge in the battle for votes, but a Budget pensions tax raid has the stench of being a vote loser. If fundamental reform is to happen, my money would be on it being after – rather than before – what is likely to be the most tightly fought general election in decades.
Tom Selby is head of news at Money Marketing