Is the Government about to start taxing pension contributions while ending the charge on withdrawals? In the Summer Budget, George Osborne published a Green Paper to consider this and similar questions in what is potentially a second radical overhaul of UK pensions in just 18 months.
I suspect the green paper does a couple of jobs. First and foremost, the government gives up an awful lot of revenue because of the way it treats pension contributions. There is serious money that the Chancellor could get his hands on with a change.
Second, it is acknowledged by everyone that pension relief is not well understood. There is clearly scope to simplify.
And third, the current system is not particularly equitable. Most of the relief under the current system goes to high earners.
Given all of that and the fact that George Osborne wants to cement his reputation for reform, and he has little to lose in asking these questions.
No, I don’t buy that idea at all. I suspect the Chancellor is still open on this and has yet to make a decision.
Almost certainly not at the level at which they do today. If I have £80 after a tax on my contribution, Either, I can put that money in an ISA - which I can draw down whenever I want – or in a PISA and see it locked away for 40 or 50 years. Even with some level of top up, the prospect of locking away my £80 in the hope it becomes £90 or £100 doesn’t exactly set the pulse racing.
There is another consideration: this arrangement requires me as a saver to have faith that no future chancellor would alter the tax regime down the line. Am I prepared to take that leap of faith?
The Chancellor might be considering an opt in for savers – if an individual already has a tax-privileged pot of money that’s going to be taxed, the Government could offer to put it in an already-taxed wrapper that will never be taxed again. The result: the Chancellor gets his tax upfront and then gives you some of it back as an incentive. So the individual has gained by not being taxed, and the Chancellor has gained cash up front. The loser would be the Chancellor’s successors.
This document opens up the possibility of a range of variants on the existing tax-free structure. We could see a pensions ISA (a PISA) which includes a sizeable government contribution, or tax relief at a standard rate for everybody. To some extent, they are quite similar things: the individual and the government both put money into a pot, which then gets locked up until you reach a certain age.
‘Radicalism’ is a good word in George Osborne’s world. I think he quite likes the notion that he is a big, bold reformer. Against that however we have to weigh the fact that his constant political calculation is “who loses?” and he isn’t going to do anything that alienates his core constituency.
That is why I don’t think the Treasury will apply these reforms to existing pension savers. It's very hard to take something away from people who have already been promised something. So I think the closest you come is to incentivise people.
That is one option. Bear in mind though, that something like nine tenths of the cost of tax relief is not the lump sum. And because people have saved and saved expecting a tax free lump sum it’s very hard to retrospectively say “sorry we've changed our minds”.
The tax-free lump sum is effectively a sunk cost already in the system and added to that it’s one of the popular bits of the tax system. Taking everybody already in a pension and moving them to an ISA-style treatment without the promise of a lump sum would not only be technically complex and politically difficult. It doesn’t net the Government much money either so for me it’s a bit of a red herring.