A pensions revolution may truly be upon us. Hats off then to City A.M. whose reporting has led the way in publicising the Treasury’s activities in advance of potential changes to how Britain incentivises pension saving.
The lurid comparison with Gordon Brown and his 1997 abolition of dividend tax credits made by former pensions minister Steve Webb last week is wide of the mark. But it is clear that George Osborne recognises that a draft proposal for a Pensions Isa provides a welcome, quick and early win for deficit reduction as it involves taxing pensions savings upfront rather than post-retirement.
It is also obvious that the much vaunted pensions freedom unveiled by the Treasury last year has made the current level of generous tax treatment of pensions unsustainable. Until then, the deal that allowed higher-rate taxpayers to claim relief on their pension contributions also brought restrictions – the insistence on buying an annuity and strict penalties on any withdrawal before reaching pensionable age. Once this regime had been swept away, it was inevitable that the Treasury would shake up a system that gave three-quarters of aggregate tax reliefs on UK pensions to the one-in-five of the population who are higher rate taxpayers.
Isas themselves are popular, successful and easily understood. But the clear and present danger with the Pensions Isa idea is that, as ever with pensions policy, the devil is in the detail – especially as it plays out in the medium term.
And the sad truth is that the great majority of Britons do not earn enough to save sufficient amounts for their retirement – unless they are strongly incentivised to do so. Accumulating a pensions savings pot is highly dependent upon contributions made by employers. The clear evidence is that, if the value of such pensions contributions is diminished by the upfront tax that lies at the heart of the Pensions Isa proposal, employers would think again about how much they would be willing to match.
Another key objection to a Pensions Isa is the fact that it shifts the burden of taxation further onto the working age population. The sense of intergenerational unfairness shows all the signs of being a major political flashpoint in Western democracies with an increasingly indebted younger generation unable to get on the housing ladder while paying ever higher care, health – and now potentially pensions – costs for a rising group of older folk.
Apart from the usual objections about implementation costs and potential impact on the wider economy, the sheer uncertainty around pensions policy suggests a period of stability is now essential. Small wonder that middle-aged Londoners like me have regarded investment of capital in property as a far better bet over the past two decades; it would surely be ever harder for savers in the future to invest or spread their risk more widely when government keeps tinkering with the rules around pensions savings.
The Association of British Insurers (ABI) has made a welcome foray into this debate, and I would endorse its preferred option for reform – a single rate of tax relief. In its proposals to review pension tax relief the ABI calls its plan a “Savers’ Bonus”, which might be set at anything between the 20 per cent basic rate and 33 per cent (still markedly lower than the current higher rate relief). The plan would be to provide a noticeable boost to ordinary working age Britons, who are currently saving well below the levels they will need to live on in retirement.
And only with such strong incentives, especially in this era of ultra low interest rates, will we all be able to build up a pension pot sufficient to see us through retirement.